The Hindu Business Line : The whys of market fall

The stock markets have been witnessing a free fall; the Sensex is perilously close to the 13,000 levels and suddenly everyone has new reasons as to why the markets are falling. Inflation, rising crude oil prices, battered Asian markets, a weak rupee. But hey! What does all this have to do with stocks? I thought stocks represented companies and with the Indian economy expanding, its companies can only continue to grow. While this may be true for the long term, Indian companies face quite a few hurdles in the near term, which have been prompting markets to price in a slower pace of growth. Recent market events also drive home the point that fundamentals apart, perceptions have a big role to play in what investors are willing to pay for stocks. Here are a few points that try to explain how recent events have triggered a fall in Indian stocks.

Crude spikes

From $93 a barrel in end December 2007, crude oil prices have shot up 54 per cent, crossing the $144-mark this week. Rising (US) interest rates-weakening dollar, political turmoil in oil producing countries and a drop in US’ oil stock piles, with Fed supply concerns have helped crude oil surge to its life high. India needs to worry about oil prices on two counts. One, rising oil inflates the country’s import bill and widens its trade deficit. Two, it could set off a chain of input price increases that companies and consumers may find difficult to handle.

Inflation peaks

With rising fuel and farm, product prices, India’s inflation rate rose to 11.63 per cent in the week ended June 21.The concerns about inflation for stock market investors is threefold. One, higher commodity prices could reduce profit margins for companies if they are unable to hike product prices. Two, inflation can make consumers spend less on big ticket purchases such as automobiles and homes. Third, government measures to tame inflation, which can take the form of interest rate hikes can further squeeze demand as well as corporate expansion plans. Policy measures such as export restrictions on farm products or pricing pressures on sectors such as cement or steel also have the potential to derail earnings for companies in these sectors.

Political turmoil

Political turbulence is always a red flag to foreign investors; the political divide at the Centre on the nuclear deal has also caused stock market jitters. Though a political change or elections may not directly affect companies, they have an important bearing on how reforms or policy measures for individual sectors may shape up in future.

Global market jitters

No equity market in today’s globalised world is an island in itself. Foreign fund flows, which pretty much decide how markets move, tend to move quickly between countries and asset classes based on where investors see potential for high returns. The view on ‘emerging markets’ may drive sentiment towards our markets. And the emerging nations themselves may depend on developed economies, especially the US (which is a major export market for Asian markets). With the US economy in trouble, institutions have taken a negative view on Asian nations, which have been ransacked by higher inflation and oil prices.

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