Sensex, Nifty selloff: Should you press 'sell' button on US credit rating downgrade?
Sensex and Nifty fared far better than Asian peers such as Hong Kong's Hang Seng, Korea's Kopsi and Japan's Nikkei, which fell up to 2.2 per cent. The performance of domestic indices was in line with European markets.
- Aug 2, 2023,
- Updated Aug 2, 2023 3:03 PM IST
A US credit rating cut by Fitch Ratings might have sent global stocks tumbling, but domestic investors need not panic, as the weakness is likely to be short-lived. Stock market prices in future earnings, said analysts, who believe Fitch just reiterated the concerns that are well-known to the stock market and mostly in the price.
To recall, Fitch had already flagged the possibility of a downgrade in May and that the move brings its rating in line with Standard & Poor's. The rating cut also does not alter the view that the US economy may manage a 'soft landing' ahead.
"The move would surely hurt sentiment. US debt had been rising at a fast pace in past few years. The interest burden was going up and the US fiscal position was not up to the mark to retain the AAA rating. That said, it is well known in the market. Fitch only reinforced the fact. The market will go back to business as usual once it absorbs the news fully in a day or two," said Gaurav Dua, Head of Research at Sharekhan.
Sensex fell over 1,000 points to hit a low of 65,431.68, before staging some recovery. The NSE Nifty index managed to hold above the 19,450 mark. The domestic indices, however, fared far better than Asian peers such as Hong Kong's Hang Seng, Korea's Kopsi and Japan's Nikkei, which fell up to 2.2 per cent. The performance of domestic indices was in line with European markets.
Fitch downgraded the US rating to AA+ from AAA over concerns of fiscal deterioration expected in the next three years. It said a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades has manifested in repeated debt limit standoffs and last-minute resolutions.
"The repeated debt-ceiling negotiations with last minute resolutions has eroded confidence in fiscal management," BOB Capital Markets said. The downgrade of the US credit rating by a notch is sentiment negative for global markets, said VK Vijayakumar of Geojit Financial Services.
"The US 10-year bond yield spiking above 4 per cent and the dollar index rising to 102 are near-term negative for emerging markets. But it is important to note that the downgrade doesn’t say anything that the market doesn’t know. So, the negative knee jerk reaction will be short lived. Globally, equity markets have been rising on the US economy’s soft landing narrative. The downgrade doesn’t alter that," Vijayakumar said.
For India, valuations are reasonable for now. Nifty trades at a 12-month forward PE multiple of of 19.1 times, which is at a 5 per cent discount to its own long period average (LPA). On the other hand, the ongoing June quarter earnings, at least for the Nifty pack, have been in line with estimates.
Profits of 33 Nifty companies that have declared results so far rose 43 per cent YoY against estimates of a 41 per cent YoY rise, said Motilal Oswal Securities. It, however, noted that Tata Motors, BPCL, HDFC Bank, ICICI Bank and Axis Bank contributed 93 per cent to the incremental YoY accretion in earnings.
Mukesh Kochar, National Head of Wealth at AUM Capital said the timing might have surprised the market. He said anything happening in the US impacts world markets.
"But we believe that the impact should be short-lived as one rating agency S&P had already downgraded the US to AA+ beforehand. Impact on the Indian market should be short-lived and other factors such as earnings, crude prices and RBI policy and fund flows will be the key to the market. Having said that, the market is heated the world over and may find a reason to correct," Kochar said.
Also read: Hot stocks on August 2, 2023: IRFC, Hawkins Cookers, Reliance Power, Sula Vineyards and more
Also read: Adani Wilmar Q1 results: Adani firm may report single-digit rise in profit, says Nuvama
Also read: Larsen & Toubro shares to turn ex-dividend today. Key details
A US credit rating cut by Fitch Ratings might have sent global stocks tumbling, but domestic investors need not panic, as the weakness is likely to be short-lived. Stock market prices in future earnings, said analysts, who believe Fitch just reiterated the concerns that are well-known to the stock market and mostly in the price.
To recall, Fitch had already flagged the possibility of a downgrade in May and that the move brings its rating in line with Standard & Poor's. The rating cut also does not alter the view that the US economy may manage a 'soft landing' ahead.
"The move would surely hurt sentiment. US debt had been rising at a fast pace in past few years. The interest burden was going up and the US fiscal position was not up to the mark to retain the AAA rating. That said, it is well known in the market. Fitch only reinforced the fact. The market will go back to business as usual once it absorbs the news fully in a day or two," said Gaurav Dua, Head of Research at Sharekhan.
Sensex fell over 1,000 points to hit a low of 65,431.68, before staging some recovery. The NSE Nifty index managed to hold above the 19,450 mark. The domestic indices, however, fared far better than Asian peers such as Hong Kong's Hang Seng, Korea's Kopsi and Japan's Nikkei, which fell up to 2.2 per cent. The performance of domestic indices was in line with European markets.
Fitch downgraded the US rating to AA+ from AAA over concerns of fiscal deterioration expected in the next three years. It said a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades has manifested in repeated debt limit standoffs and last-minute resolutions.
"The repeated debt-ceiling negotiations with last minute resolutions has eroded confidence in fiscal management," BOB Capital Markets said. The downgrade of the US credit rating by a notch is sentiment negative for global markets, said VK Vijayakumar of Geojit Financial Services.
"The US 10-year bond yield spiking above 4 per cent and the dollar index rising to 102 are near-term negative for emerging markets. But it is important to note that the downgrade doesn’t say anything that the market doesn’t know. So, the negative knee jerk reaction will be short lived. Globally, equity markets have been rising on the US economy’s soft landing narrative. The downgrade doesn’t alter that," Vijayakumar said.
For India, valuations are reasonable for now. Nifty trades at a 12-month forward PE multiple of of 19.1 times, which is at a 5 per cent discount to its own long period average (LPA). On the other hand, the ongoing June quarter earnings, at least for the Nifty pack, have been in line with estimates.
Profits of 33 Nifty companies that have declared results so far rose 43 per cent YoY against estimates of a 41 per cent YoY rise, said Motilal Oswal Securities. It, however, noted that Tata Motors, BPCL, HDFC Bank, ICICI Bank and Axis Bank contributed 93 per cent to the incremental YoY accretion in earnings.
Mukesh Kochar, National Head of Wealth at AUM Capital said the timing might have surprised the market. He said anything happening in the US impacts world markets.
"But we believe that the impact should be short-lived as one rating agency S&P had already downgraded the US to AA+ beforehand. Impact on the Indian market should be short-lived and other factors such as earnings, crude prices and RBI policy and fund flows will be the key to the market. Having said that, the market is heated the world over and may find a reason to correct," Kochar said.
Also read: Hot stocks on August 2, 2023: IRFC, Hawkins Cookers, Reliance Power, Sula Vineyards and more
Also read: Adani Wilmar Q1 results: Adani firm may report single-digit rise in profit, says Nuvama
Also read: Larsen & Toubro shares to turn ex-dividend today. Key details