Markets under bear grip in Aug, post biggest monthly fall since Jan

The Indian markets have been turbulent in August 2011 on the back of global uncertainty and FII selling. The Sensex tumbled 8.36% and the Nifty dropped 8.77%

Major news for the month:

July inflation at 9.22% versus 9.44%

June IIP at 8.8% versus 5.6%

L&T Q1 net profit up 12%

Bharti Airtel Q1 consolidated net profit down nearly 28%

Tata Motors Q1 consolidated net profit at Rs2,000 crore

India’s factory output falls to a 20-month low in July

Q1FY12 GDP at 7.7% versus 9.3% yoy



Indian indices

August has been a very bad month for the market in year 2011. The Indian stock markets posted second straight monthly drop and the biggest percentage decline since January as rising rates and global economic uncertainty triggered a flight from risky assets.

Investors remained nervous in August on the back of fears of a possible US double-dip recession and escalating European sovereign-debt woes. Worries over the health of the global economy on the back of poor economic data and the United States losing its top-tier ‘AAA’ credit rating to ‘AA+’ from Standard & Poor's led the investors to stay away from markets. Also, macro economic factors like high inflation and interest rates have been hampering growth back home. Data showing heavy selling by foreign institutional investors ( FIIs) spooked the markets.

On the last trading session of the month, Q1FY2012 GDP data came in line with Street estimates, which was cheered by investors. However, the overall market mood remained cautious in August.

The Sensex swung 2675 points between a monthly high of 18440 and a monthly low of 15766. The Nifty swung 832 points between a monthly high of 5552 and a monthly low of 4720. To close the month, the Sensex fell 8.36% or 1520 points at 16677 while the Nifty dropped by 8.77% or 481 points at 5001.

Global indices

All the global stocks remained under pressure in August on growth slowdown concerns. Dax100 was the biggest loser of the month falling by 19.19%. Following that CAC40 down by 11.29%, Nikkei down by 8.93%, Hang Seng down by 8.49%, Sensex down by 8.36%, FTSE100 down by 7.23%, Nadaq down by 6.42%, Shanghai Composite down by 4.97% and Dow Jones down by 4.36%.

Sectoral and stock screening

All the sectors closed the August month on a negative note. Worst performers - BSE Realty fell by 14.78%, BSE Metal down by 13.7%, BSE IT lost by 13.26%, BSE Bankex declined by 12.4% and BSE TECk dipped by 12.03%.

On stocks’ front, top three gainers of the month - Hero MotoCorp shot up by 14.58%, Jubilant FoodWorks surged by 10.77% and Bajaj Auto rose by 7.38%. Top three losers of the month - SKS Microfinance dropped by 51.54%, Educomp Solutions fell by 40.98% and BF Utilities down by 39.65%.

FII/MF activity

The FIIs sold heavily in August to the tune of Rs10,833.9 crore following global bloodbath as compared to net buy of Rs8,030.1 crore in July. The domestic institutional investors (DIIs) continued its buying activity in August and purchased Indian stocks worth a net of Rs2,496.7 crore as against net buy of Rs679.8 crore in July.

Outlook

Challenges remain but risk-reward favourable now:

After a sharp sell off, the benchmark indices have bounced back in the past couple of days. However, the rally may not be sustainable in the face of continued global uncertainties, earnings downgrades and forthcoming RBI policy review meet in the third week of September. Given the stubbornly high inflation and decent GDP growth figures for Q1, we expect RBI to hike policy rates by 25 bps and keep the tone hawkish to anchor inflationary expectations. Notwithstanding the near-term challenges, the risk-reward ratio has turned favourable now and the view remains positive with a 12-18 month time horizon.