GDP credibility, high valuations hit market sentiment

The market sentiment in Indian bourses has seen a constant decline in the past two months as the investors have been trying to adjust unsustainably high valuations and doubts surrounding the growth numbers.

The advances to declines ratio of all the companies being traded on the Bombay Stock Exchange (BSE) stood at an average of 0.73 during the first half of May, a decline of 24% from the average 0.96 in April.

This means that for every 100 declines there were only 73 advances on the BSE during the month of May.

With this dip in the month of May, the cumulative dip in the advances to declines ratio in the past two months stands at 38.7%. In March, when markets had witnessed its biggest rally since 2007, the advances to declines ratio had peaked to 1.19.

The last time markets witnessed such low sentiment was in September 2018, when IL&FS fiasco had caused ripples across scrips.

At an average, the markets have seen 1,663 declines on a daily basis, as against 1,212 average advances. While the average daily advances have seen a decline of 15.1% from April's daily average of 1,428 advances, the declines have jumped 12% from 1,485 in April.

Analysts attribute the phenomenon to the lack of credibility surrounding the GDP numbers. "We don't know what exactly to believe now," a big-ticket investor confided to DH. Last week, it was reported that 36% of the companies accounted for in the GDP were not traceable.

Market analysts also attribute the phenomenon to the unsustainably high valuations. "Most of these stocks were over-bought. There were a lot of foreign funds that were flowing into the Indian markets. There was also a lot of EPFO money flowing into the Indian markets," an analyst said.

According to the estimates, the markets have seen an inflow of Rs 50,000 crore to Rs 60,000 crore from the Employee Provident Fund Organisation. The EPFO had started investing in the stock market in August 2015 with a 5% exposure, after the government allowed it to do so in April 2015. It had subsequently raised its exposure to 10% in the last financial year, before further hiking it to 15%. The organisation has annual accruals of close to Rs 1.5 lakh crore, 15% of which is invested in equities.

Markets had also seen a surge in the past three years owing to the dearth in the options available post-demonetisation drive by Prime Minister Narendra Modi in November 2016.

However, the muted growth in the Q4 results, coupled with the bleak outlook for upcoming quarters, triggered the sell-off in the markets. Three out of past four years have seen a decline in total corporate earnings, contrary to the market trends.