Why the Sensex fell by more than 600 points in two days?

Here are seven key reasons why the Sensex wilted at the top.

Jan 22, 2020 11:01 IST India Infoline News Service

Sensex Descent graph
A correction of 600 points in the Sensex on a base of 40,000 is just about 1.5%. If you look at the stock market rally since September 2019, this looks more like a small hiccup. But, the 600 points correction in the Sensex in 2 days is significant for two reasons. Firstly, this correction comes at a time when the market is normally in the midst of a pre-budget rally. Secondly, this rally is accompanied by a sharp spike in volatility as measured by the VIX. Here are seven key reasons why the Sensex wilted at the top.

Disappointing results from heavyweights
To be fair, there were no major worries in the heavyweight numbers. However, there were some minor irritants. TCS was the only big IT name to show flat growth. HDFC Bank continued to grow but markets were disappointed with the rise in gross NPAs and provisions. Same was the case with another heavyweight, Kotak Bank. Above all, Reliance Industries flattered on retail and on telecom ARPUs but, disappointed in its traditional metrics of GRMs and petchem margins. That was a key trigger for the Sensex correction.

IMF downgrades GDP growth for 2019-20 to 4.8%
IMF is not the first to downgrade full year GDP growth because RBI and Moody’s have already pegged GDP for FY20 at 5% and 4.9%, respectively. But, the markets were shocked by the intensity of the downgrade from 6.1% to 4.8% in one stroke. Markets were, perhaps, more disappointed that Chinese GDP growth for 2019 was upgraded by 10bps to 6%. IMF warnings on fiscal profligacy also kept the markets on tenterhooks.

Telecom woes and the Vodafone effect
Between Bharti and Vodafone they need to shell out close to Rs80,000cr to the DOT in the form of AGR charges, interest and penalty. The Supreme Court has refused to grant any relief and this has the potential to push Vodafone Idea to the brink of default. With its huge exposure to banks and mutual funds, the telecom tangle is surely an area of worry. The DOT is yet to confirm on postponement of the January 23, 2020 deadline.

Weak domestic airline passenger data
The Directorate General of Civil Aviation (DGCA) announced the airline passenger traffic growth for 2019 at just 3.74%. This compares very unfavourably with 18.6% growth in the year 2018. During the year, the closure of Jet Airways seriously impacted the growth of the sector but investors have a bigger concern. They see a sharp slowdown in airline passenger traffic as a proxy for slowdown in consumption. That had a cascading effect on other consumption plays like auto and FMCG; as was evident on  January 21, 2020.

Mumbai direct tax collections dip 13%; first time in 10 years
Direct tax collections from Mumbai fell by 13% till mid-January. Of course, the tax collections pick up in the last two months but this 13% fall in Mumbai is the worst de-growth in 10 years. This is also significant because Mumbai alone contributes nearly 37% of all India direct tax revenues and this could have a bearing on government revenues. This is also a negative cue for consumption.

Moody's cuts Hong Kong ratings
In a move that was long expected, Moody’s cut the ratings of Hong Kong government’s senior unsecured debt from Aa2 to Aa3. This downgrade was triggered by the political unrest that has marked Hong Kong in the last few months in protest against rising Chinese domination. Moody’s also expressed doubts that due to continued political unrest, the original model of One Nation, Two Systems may not work. This could lead to risk-off approach by portfolio investors; negatively impacting emerging markets like India.

No reformist cues from the Budget
The Sensex correction also reflects reduced hopes that the FM could present a big bang budget. With falling revenues and the IMF watching the fiscal deficit with a hawk eye, the options in front of the government are fairly limited. The government needs to push spending but cannot afford too much spillage on the fiscal deficit front. The budget needs aggressive reforms, but revenue shortfall could be the primary challenge. Hence, expectations of a reformist budget are gradually waning.

Valuation fatigue interrupts the rally
To cut a long story short, it also appears to be a case of valuation fatigue setting in. With the Sensex close to its historic peak, any negative surprise in terms of macros or quarterly results was always going to be magnified. What we have seen in the last 2 days is just a microcosm of that!

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