Sensex recovers after falling 400 points in morning trade; what dented sentiment?

Stock market today: The headline indices slipped around 0.60 per cent in the morning trade on Wednesday. Investor sentiment took a hit after Moody's on Tuesday downgraded several small and mid-size US banks and said it may downgrade some of the nation's biggest lenders. The 30-share index Sensex of the BSE fell as much as 402 points to 65,444.38 levels against yesterday's close of 65,846.50. However, the indices recovered later, and at the close, the index stood at 65,995.81, up 149 points or 0.23 per cent while the NSE's Nifty ended at 19,632.55, up 61.70 points, or 0.32 per cent.

Moody's said elevated commercial real estate (CRE) exposures are a key risk due to high-interest rates, declines in office demand as a result of remote work, and a reduction in the availability of CRE credit.

The agency also changed its outlook to negative for eleven major lenders, including Capital One, Citizens Financial, and Fifth Third Bancorp.

G Chokkalingam, Founder and Managing Director at Equinomics Research, says there is no need for India to worry about the downgrade of the banks in the US for two reasons. One, Indian banks are not at all dependent on the global financial system. Almost 99 per cent of the lending happens here. Secondly, banking credit growth is at a record 10-year high, and banks' asset quality is also at a decade high, which indicates a robust domestic growth story.

Commenting on today's weakness, the analyst added that it could be due to negative sentiment given weak global cues. However, the medium- and long-term view of the market remains intact. But, in the short term, the market may see some correction as many small and mid-cap stocks are in the bubble zone. "The biggest problem is that the overall market capitalisation is over Rs 300 lakh crore, which is 110 per cent of FY23 nominal GDP. Further, around 70–80 per cent of the small and midcap stocks do not have valuation comfort. Many stocks are trading at 20 P/E, 30 P/E, and 40 P/E, and the promoters are selling stock.

There is a study that says promoters of 200–300 small and mid-cap companies have sold their shares. Further, in a lot of unlisted spaces, promoters are unlocking money through the primary market. So, the liquidity is being sucked out of retail investors on the one hand, and on the other, the valuations of many mid-and small-cap stocks are in a bubble zone.

"So, in the short term, I am expecting a 3-5 per cent correction in Sensex and many small and mid-cap companies in order to touch a reasonable valuation.

Ambareesh Baliga, an independent market expert, said weakness in markets could be attributed to a number of factors, such as weak global cues, Q1 results, indecisiveness ahead of RBI policy decisions, and profit-booking in those stocks that rallied during the record-setting sessions recently.

Key developments you need to know

US: All is not well

Days after Fitch downgraded the US government's top credit rating, Moody's this week downgraded a number of US banks. The collapse of Silicon Valley Bank and Signature Bank earlier this year sparked a crisis of confidence in the US banking sector, leading to a run on deposits at a host of regional banks despite authorities launching emergency measures to shore up confidence. Still, Moody's cautioned that banks with sizable unrealized losses that are not reflected in their regulatory capital ratios are vulnerable to a loss of confidence in the current high-rate environment.

Around a week earlier, Fitch downgraded the United States to AA+ from AAA, citing fiscal deterioration over the next three years and repeated down-the-wire debt ceiling negotiations that threaten the government’s ability to pay its bills. Fitch had first flagged the possibility of a downgrade in May, then maintained that position in June after the debt ceiling crisis was resolved, saying it intended to finalise the review in the third quarter of this year.

China data add to woes

China's exports fell 14.5 per cent in July year-on-year, while imports contracted 12.4 per cent, customs data showed on Tuesday, in the worst showing for outbound shipments from the world's second-largest economy since February 2020. A Reuters poll of economists had forecast a 12.5 per cent fall in exports and a 5.0 per cent drop in imports.

Besides, data show that China’s economy has fallen into deflation after consumer prices declined for the first time since early 2021, which is one of the starkest indicators of the challenges facing policymakers as they struggle to revive consumption.

Hiccups ahead of RBI policy decision

The market witnessed pressure as investors awaited the RBI's monetary policy decision that is due tomorrow. Experts at large expect the central bank to maintain the status quo on rates; however, a rise in vegetable prices, such as tomatoes, may see some unexpected tweaks in the policy, many believe.