5 reasons why Indian markets continue to fall

Brining clarity on minimum alternate tax (MAT) on foreign institutional investment (FII) has failed to stop them from withdrawing their investments in India. After a record outflow in August 2015 of Rs 17,248 crore, FIIs have sold Rs 2,205 crore of shares in the first two days.

FIIs selling have a lot to do with the global selloff in equity markets, but there are other reason too that FIIs are not interested in staying in India. We look at five such reasons.

Poor economic numbers: First is that there seems to be no signs of economic revival. The recent GDP data released shows little signs of a pick-up in activity. The much awaited growth is nowhere to be seen. Like Jim Rogers many FIIs feel that you cannot invest on the basis of hope. The way banking stocks are being hammered in the market, few expect a recovery in the near future.

ETF outflow: Most of the FII selling in the markets is coming from emerging market ETF (exchange traded funds). A Barron’s report says that over the past week between August 27 and September 2, $4.4 billion was withdrawn from emerging market while $11 billion was invested in US and Europe. Investors have been selling their stake in emerging markets for eight weeks in a row.

Currency pressures: Withdrawal by FIIs has put pressure on Indian rupee. Currency has an impact on the returns earned by FIIs. A note by Phillips Capital says that rupee has weakened against the dollar by almost 6 per cent in the current fiscal, by 5 per cent in the calendar year and 9 per cent over previous year on account of weakness led by capital outflows due to weaker economic performance; currency weakness of India’s trading partners. Rupee, the report says is still overvalued on REER (real effective exchange rate) basis thus there is tepid intervention by RBI and the government to prevent weakness.

US interest rates: ETF withdrawal has a lot to do with the hope that US interest rates will be increased by the Federal Reserve. In such a case investors feel it is safer to invest in USA as the rate hike signals a confidence by the central banker on the state of the economy. Given the current fall some economists feel that the Fed will delay raising rates to December 2015. Dr Nouriel Roubini, popularly known as Dr Doom advised investors to stay away from emerging markets. He is bullish on safe assets like developed markets government bonds but feels that interest rates will be hiked only in December. Till the Fed clears the air in its meet on September 17-18, 2015 markets will remain volatile.

Superstition: As though poor economic parameters were not scary enough, investors are latching on to superstition and hearsay. The latest buzz in the market is on an event called as ‘Shemitah’ which happens every seventh year as per the Jewish calendar. This year the day falls on September 13, 2015 which is a Sunday. But Shemitah coincides with a solar eclipse. The last two times such an event occurred was in 1931 and 1987. In 1931, within days of Shemitah, Bank of England decided to abandon the gold standard which pegged its currency to gold. This led to a currency war which engulfed most of the developed world. In 1987, Shemitah fell on the day when Dow Jones saw the biggest single day fall in its history.

There are many reasons for the markets to fall, but smart investors and fund managers continue to advice their clients to invest in the market. Presently no one is in the mood to listen to them. It’s time to be greedy when others are fearful, said one such advisor, whom we all know as the sage of Omaha. Shouldn’t we listen to him?