Sensex plunges 400 points, Nifty ends below 10,000 on trade war fears

Mumbai: Benchmark indices BSE Sensex and NSE’s Nifty 50 plunged to five-month lows on Friday as jittery investors rushed to sell shares on heightened fears of a trade war after US President Donald Trump announced tariffs on up to $50 billion of Chinese imports. The sharp sell-off in Indian markets was part of the global meltdown, as global risk aversion intensified.

During the day, both the Sensex and the Nifty shed over 1% of their value, while the latter dipped below the 10,000-mark. The Sensex closed at 32,596.54, down 409.73 points, or 1.24%, while the Nifty ended at 9,998.05, down 116.70 points, or 1.15%. The Indian benchmark indices have fallen over 10% from life highs touched on 29 January.

Deepak Jasani, head of retail research at HDFC Securities Ltd, said the market slump seems to be a bit of an overreaction, coming at a time when year-end considerations were weighing on markets anyway. “Weak domestic factors, coupled with trade war fears, may further drag the markets if a recovery is not seen by Monday. If the markets break crucial support levels, it will lead to further selling and take the Nifty to 9,650,” he said.

Markets worldwide were under pressure, following weakness in the US markets. Markets in Japan, China, Hong Kong and South Korea have slipped 2-4%, while European markets opened lower.

Trump has instructed US trade representative Robert Lighthizer to impose broader tariffs on at least $50 billion of Chinese imports, as recompense for alleged intellectual property abuses. In response, China said it does not fear a trade war with the US and announced plans for reciprocal tariffs on $3 billion of imports from the US.

Sonal Varma, chief India economist and Aurodeep Nandi, India economist at Nomura, said that although marginal, India is also exposed to a slowing China and increased US trade protectionism; there is room for a policy response.

“The Reserve Bank of India (RBI) has been building forex reserves as a means of self-insurance from financial-stability risks and will use them to defend the rupee if needed. The monetary policy stance is neutral and rates can be hiked to rein in inflation expectations, but given balance-sheet concerns, we do not expect aggressive rate hikes,” they wrote in a report.

Sahil Kapoor, chief market strategist, Edelweiss Investment Research, said risks to global trade are real and tremors in the markets are just a reflection of that.

“The total size of global trade is about $20.8 trillion and all the participants benefit from it. The magnitude of tariffs imposed currently are small but could have other repercussions. Currently, we are still at an early stage to understand nuances of trade war, but if it happens, the global recovery may have to write its obituary faster than expected,” he added.

The sharp sell-off in markets follows an interest rate hike by the US Federal Reserve. The Federal Open Market Committee, meeting for the first time under new chairman Jerome Powell, raised the benchmark lending rate by a quarter percentage point.

Policymakers continued to project a total of three interest rate hikes this year. The central bank projected a median federal funds rate of 2.9% by the end of 2019, implying three rate hikes next year, compared with two 2019 moves seen in the last round of forecasts in December. Higher interest rates in the US generally lead to outflow of foreign funds from emerging markets considered to be riskier assets.

However, analysts do not see any impact on the foreign fund flow into India but are worried that the markets are likely to correct further due to both global and domestic factors. “We are looking for further correction till about 9,600 levels. Currently, Indian markets are trading at 17 times on one-year forward price-to-earnings (PE) basis. At 9,600 levels, we feel valuations will become attractive. We continue to be bullish from longer term perspective,” said Kapoor.

According to Ajay Bodke, chief executive and chief portfolio manager at brokerage Prabhudas Lilladher Pvt. Ltd, the markets have to navigate both domestic and global headwinds now. “Besides trade war fears, US bond yields are also hardening, which may constrain RBI from cutting rates. This is going to cause turbulence, while political anxiety in India is going to add to volatility,” he said.

However, Bodke also added that India is at the cusp of revival in earnings, which is likely to comfort markets and debt resolution by some of the stressed firms are positive factors for the markets.

“The markets are close to fair valuations,” he added. Currently, the Sensex is trading at 17.40 times its expected earnings for the current fiscal, which makes it one of the most expensive gauges among peers.

So far this year, the Sensex and Nifty slipped 4-5%. FIIs have bought Indian shares worth $1,659.90 million, while domestic institutional investors (DIIs) have pumped in Rs19,689.53 crore so far in 2018.