The last one month has been a bad month for the global markets and we have also fallen by the wayside. You would have read a lot of theories in all kind of places as to why this is happening and what is to be expected going forward. I thought it will be a good idea to do a 2 part post explaining things in a layman like manner. In this first part, I will try to make some sense of why the markets have fallen so much and so fast.
The rise and fall of the market indices are really a collective impact of the rise and fall of the individual stocks that make them up. For example if ITC, Tata Motors and ICICI Bank are part of Sensex then a steep fall in them will almost guarantee that the Sensex falls too. Now, in some situations this can be balanced by other stocks rising in the same period but that is not the case right now. The individual rise or fall of a stock will depend on several factors, but the key determinant is always the demand and supply of that stock. So if there are many people wanting to buy ITC but few people willing to sell it then the price at which the stock is traded is bound to rise. If this keeps on for some time then the rise can be quite spectacular. In a similar manner if a lot of people are trying to sell a stock then the price at which the stock is traded can fall precipitously.
Now, obviously one time when people want to buy a stock is on some good news like great quarterly results, bonus shares in the offing etc. Similarly bad news will also result in people wanting to sell off the stock. This is easy to understand but will not explain the kind of fall that our markets have seen lately. In order to understand that we must figure out the stock holding pattern of most stocks which are part of our Indices. Foreign Institutional Investors are large holders and Domestic Institutional Investors which are linked to Government as well as Domestic Mutual Funds are the next in line. When these people anticipate a likely calamitous fall in the market then the sell off starts. Also, when some other markets are likely to do well in the near term, FII can pull money out of a relatively good market and put it in the more futuristic one. What you and I buy or sell really does not matter. Retail participation in direct equity is minuscule and though domestic MF have grown manifold they are not a match to the FII muscle.
Why are the FII selling off then? The following reasons are interesting:-
- China growth story is seriously hindered. With their share of world trade the greatest at more than 5 %, this has impact over a lot of companies globally. As these companies are expected to do poorly, the equity markets they are part of will react negatively. China itself is the worst affected of course.
- As the Chinese markets fall at some point they will become an attractive buy. FII money to be deployed here will have to come from other markets.
- Europe growth has been largely stagnant and though USA and Japan are a little better off today, they cannot make up for the China meltdown.
- The oil glut has meant that the prices of Crude oil have kept getting lower. This has an impact on the business and Economy of places such as the Middle East in a big manner. At some point reducing oil prices are injurious to other Economies too.
- Since a lot of FII money comes from the US, the raising of rates by US Fed affected other markets badly, as US suddenly became a better place to put money.
- Unfortunately for India the local situation is no better and this has compounded the speed at which markets fell. There is a serious policy logjam, quarterly earning growth is virtually absent, Rupee is declining to lowest value in years and consumer confidence is low. This hastened the sell off by FII.
Who is buying then? Well Domestic players would like to buy but they do not really have the capacity or the confidence to absorb what is being thrown at them. That being the case, markets are not finding any real support. In the last few months Nifty had come down to 7500 or so many times but it had got support there. Today it has been decidedly breached and no level seems sacrosanct.
What is likely to happen for our markets in 2016 then? Well, I am no expert and the crystal ball is decidedly hazy – but I will make an attempt to address this tomorrow.