The year 2022 has begun badly for the Indian stock market.
Over the past five trading sessions, key domestic indices Sensex and Nifty50 have both plunged by over 6% due to losses in financial and technology stocks. On January 25, at the time of publishing this report, the Sensex was down 245.21 points, or 0.43%, at 57,246.30 points.
“The trend in global stock markets has turned distinctly bearish. Last week, S&P 500 and Nasdaq closed 8% and 15% below their all-time highs,” said VK Vijayakumar, chief investment strategist at brokerage firm Geojit Financial Services. “…the bulk of the selling is happening in non-profitable tech stocks. This trend is impacting stocks like Zomato and Paytm in India, too”.
Shares of technology startups like Paytm, PolicyBazaar, Nykaa, Zomato and CarTrade Tech, which hit the bourses last year, are now trading at a 20%-50% discount to their issue price.
The major concern for markets currently is inflation and the anticipated rate hike by the US Federal Reserve in a couple of days.
Federal Reserve’s effect
Indian shares mirrored the decline in global stocks largely due to a rise in bond yields amid growing expectations that the US central bank will raise key interest rates.
Higher US yields and interest rate hikes tend to make investments in equities in emerging markets like India less attractive, leading to an outflow of foreign funds. This is why foreign portfolio investors have begun reorienting to less-risky assets like gold.
Foreign portfolio investors pulled out $1.84 billion (Rs 13,780 crore) from Indian equities in the last one week alone, according to data by the National Securities Depository.
“Passive money is getting withdrawn from emerging markets, including India, influenced by US bond yield, Fed’s tapering decision, and expected rate hikes as a result of high inflation in the US,” Ravi Sardana, an investment banker told The Economic Times newspaper. “Foreign portfolio investors-heavy stocks could be under pressure if foreign portfolio investors’ outflow intensifies.”
Among the 132 companies with over 20% foreign portfolio investors holding, 61 declined by up to 20% last week.
Newly-listed firms bruised
Shares of newly-listed companies like Zomato and Nykaa are reeling due to an aggressive sell-off.
The damage has been greater because some of these companies had valuations richer than what their fundamentals allowed. Analysts had also cited expensive valuations as a cause of worry. Nevertheless, investors lapped up their public offers expecting high growth amid a low-rate environment.
For example, the retail quota in Zomato’s IPO in July 2021 was subscribed eight times. In Nykaa’s case, it was 12.2 times.
“Most stocks that went public recently are very expensive and a much-needed correction is now underway,” Anita Gandhi, director at financial services firm Arihant Capital Markets told Reuters.
As the valuations of loss making companies come down
— sandip sabharwal (@sandipsabharwal) January 24, 2022
Their ability to raise capital to fund these losses will also reduce
This will force them to cut down their loss making growth
Which will lead to a further decline in valuations
Pressure on earnings
Analysts say earnings of Indian corporates in the December quarter so far have failed to enthuse. Inflation, meanwhile, is on the rise, and the resultant increase in input costs has hit profitability.
Companies like Hindustan Unilever have hinted at stress in the rural economy while Bajaj Finance has suggested that urban low-income consumers remain affected by the pandemic.
To make it worse, crude oil prices rose to a seven-year high, potentially eating into corporate margins going ahead.
This article first appeared on Quartz.