Perfect storm’ may hit D-Street in 6 weeks, can sink stocks.

An over 4,600-point fall in BSE Sensex in just 25 sessions may be feeling like disaster! 

 

But wait, the worst is yet to come. At least one analyst is predicting a ‘perfect storm’ on Dalal Street in less than six weeks, and citing solid reasons too! 

The Indian equity market has become ultra-sensitive to weakening macros and negative news flows such as oil price rise, rupee crash and some corporate developments. 

But a few foreseen events could unfold in the day  ahead, which may go against market wishes and trigger a massive correction for domestic stocks: US sanctions in Iran is one, US midterm polls is another  and outcome of India’s own state elections could be the third. 

More pain in the offing 

We believe the Nifty 50 is headed for the 9,900 level.This translates into a further 400 points slide in Nifty and 1,200 points fall in the Sensex from current their levels.

The biggest worry could be Iran sanctions that will come into effect on November 4. India sources 10-12 per cent of its crude requirement from Iran. 

Analysts says the stock market is still under-estimating the possible disruption to crude output, especially in the light of the fact that Saudi Arabia and Russia – two major producers – have ignored recent US calls to increase crude production. A major disruption may cause crude prices to see a major spike .

Testing time for investors 

Foreign equity outflow from India has already topped Rs 17,664 crore so far this year, which is the worst since the Rs 52,987 crore FII outflow recorded in 2008. Foreign portfolio investors (FPIs) have sold equities worth Rs 1,500-1,600 crore in last three consecutive sessions. Should concerns over emerging markets deepen, the FII selling may intensify. 

Foreign investors own a whopping $408 billion worth of holdings in BSE200 stocks. 

Markets move on liquidity. Mutual fund schemes are sitting on losses this year, but they have somehow managed to bring in retail money. Will retail investors to sit tight despite negative returns is something that remains to be seen. They have not faced this dilemma for long .

US mid-terms elections & trade rhetorics 

How the US deals with friends and foes post its mid-term elections and how the outcome influences key decision such as trade war and Iran sanctions remains to be seen. US holds mid-term polls in November. 

One must see whether the rhetoric on trade war starts to recede post the US mid-term elections.

India has deferred its decision on retaliatory tariff in response to the recent US duty hikes till till November 18. Delhi would want clarity to emerge on the US response on Iran sanctions, analysts said. 

In 2013, India had received a partial waiver of sanctions on that country. 

We expect sanctions to adversely impact international crude oil prices, and India will be impacted more due to higher domestic oil prices, inflation, fiscal, bond yields and rupee weakness.

State elections 

Forthcoming state elections could become another pain point ; three major states – Rajasthan, Madhya Pradesh and Telangana – go for assembly elections this quarter, along with two smaller states – Chhattisgarh and Mizoram. 

The results of these state elections could set the tone for the general elections to be held in May, 2019, it said. 

In a bear case scenario, Bhatia said, if even the outcome of state elections  is unfavourable, it will be a perfect storm. 

We can fall significantly more from here on because our premium over some of the other emerging markets will have to shrink significantly.

Meanwhile, the government’s move to cut fuel prices has not been taken positively by the market, as it raised fears of more populist measures as the elections draw near. 

Shares of OMCs plunged up to 25 per cent on Friday, in addition to a similar fall seen in the previous session. 

Analysts noted that during the last two state elections – Gujarat (November 2017) and Karnataka (June 2018) – marketing margins for both petrol and diesel had turned negative in the months leading up to the elections. 

MORE WILL UPDATE SOON!!