contagion seems to be spreading fast across Europe. Ratings major Standard & Poor’s (S&P) on Wednesday cut its ratings on Spain by one notch to AA from AA-plus.
Earlier in the day, Indian shares joined the worldwide slide in equities and commodities, after S&P had lowered Greece’s debt rating to junk and that of Portugal by two notches on Tuesday.
Brokers and fund managers said the outlook on India’s economy and corporate earnings remained upbeat, notwithstanding the latest upheavals in Europe. But the flow of foreign money into the stock markets could be affected as global investors booked profits in emerging markets like India, to offset losses in other parts of the world, they said.
“The developments in Europe are unlikely to hurt the earnings potential of Indian companies, but investors may question the price-to-earning multiple of (Indian) equities,” said Kenneth Andrade, head-investments, IDFC SSKI Asset Management.
Indian shares are trading 16-17 times estimated earnings for the current financial year, and most investment managers say they are neither cheap nor too expensive.
BSE’s 30-share Sensex shed 310.54 points, or 1.8%, to close at 17,380.08. The 50-share Nifty crashed 92.90 points to close at 5,215.45. Key markets in Asia ended 1-2% down, and European markets too declined 1-2%.
“While valuations in India are not too stretched, in the immediate term, we remain anxious about the global risk trade unwinding,” said Keshav Sanghi, MD and head of equities, Citigroup Global Markets, India. Bond prices moved up a little and traders expect that the 10-year government paper to be auctioned on Friday will have a yield of below 8%.
Provisional data on the stock exchanges showed foreign funds were not heavy sellers even as many second-line shares fell sharply. Overseas investors net sold Rs 131 crore of shares while domestic institutions bought Rs 324 crore of shares on a net basis. So far in 2010, foreign funds have net bought $6 billion of Indian shares.
Market players expect more volatility on Thursday because of the expiry of derivatives contracts. If the downtrend persists, many traders holding long positions may choose not to carry them forward.
“Emerging markets in Asia have not yet seen a knock-on contagion impact on account of Greece and Portugal and retraced less than Brazil or Mexico today,” Mr Sanghi said. “I believe that there are quite a few macro international variables that still need resolution and the market is in a wait-and-watch mode near term,” Mr Sanghi added.
In the global markets, yields on Greek two-year debt soared to a record 26% and the euro hovered around near a one-year low against the dollar as investors worried that the sovereign debt crisis in parts of Europe may soon spread to markets as well.
Shares of metal, oil and gas, and realty companies were the worst affected, with the respective sectoral indices on BSE falling 2-3%. Shares of FMCG and healthcare companies closed flat to slightly lower, as investors moved a part of their money to defensive stocks.
“The problems of Greece do not have any direct implications for India,” said Vikram Kotak, chief investment officer, Birla Sun Life Insurance.
“But the big worry is a series of bad news—interest rate hike, inflation, high valuations, spate of share offerings—hitting all at once. We see the Sensex moving in a range of 14,000-18,000 over the next few months. But at the moment, a correction appears more likely,” said Mr Kotak.
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