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There is an offer for sale (OFS) scheduled in Indian Oil Corporation (IOC) today. The government hopes to divest 10 per cent stake (about 242.7 million shares) to raise close to Rs 9,500 crore. Under normal circumstances, this is a reasonable target. The floor price of the OFS is Rs 387 and it last traded on Friday at Rs 394-395. So the offer could fetch a minimum of Rs 9,302 crore.
But circumstances are not normal. The timing of the OFS could turn out to be awful through no fault of the government of India. Last week saw a perfect storm brewing up across the global economy. Every major stock market was hit by big losses. Commodities hit multi-year lows. Emerging market currencies took a hammering.
The proximate cause was China. An economic slowdown and a sharp correction in China's equity markets has triggered contagion. US markets experienced their worst week since September 2011. The Dow Jones Industrial Average was down 5.8 per cent, week-on-week. The Shanghai Composite dropped twice as much, losing 11.5 per cent week on week.
Shanghai dipped to the same levels (3,500) of early July, when Chinese authorities started a massive intervention. China continued to take drastic counter-cyclical steps. It devalued the yuan (CNY) by 4.5 per cent by resetting the formula by which the People's Bank of China sets daily trading limits. This was the biggest devaluation since the 1990s. It came in the wake of China's exports falling 8.3 per cent in July. The Manufacturing PMI (Purchasing Managers' Index) dropped to levels not seen since March 2009. The PMI also indicated six successive months of contraction in factory output.
Every major commodity is trading down in direct response to the 'China syndrome'. Copper, zinc, lead, aluminium and iron are at multi-year lows. Every crude contract has trended down for weeks. Brent is down to $45/barrel while the West Texas Intermediate (WTI) is down to $40. Gold was up last week, probably because of the fear factor.
The CNY devaluation has promptly resulted in competitive devaluation with every other emerging market (EM) currency down. The rupee lost a relatively minor three per cent. The South African rand, Turkish lira, Russian rouble and Malaysian ringgit have hit multi-year lows and Kazakhstan devalued the tenge by over 20 per cent as it launched a free float. The ringgit is down to levels not seen since the so-called Asian Flu of 1998.
In contrast, the US dollar is obviously up and so is the euro, due to the unwinding of carry trades, where traders borrowed euro to enter EM assets. As always, a flight to safety translated into foreign institutional investors (FII) pulling out of EM assets and heading for US treasuries. Yields on US treasuries have fallen substantially. In the eurozone, German government bond yields are down but Spanish and Italian yields are up. Greece has received a third bailout but it is also going to see another election. Credit default swaps on euro indices have become more expensive, highlighting rising fears. Indeed, volatility indices (VIX) are up everywhere as is natural in falling markets.
Given the all-round weakness, traders have started hoping that the US Federal Reserve will not hike rates in September. The minutes of the July Federal Open Markets Committee showed concerns over low global growth and low US inflation. So, there's a good chance the Fed will indeed, hold off.
Citibank has cut global gross domestic product (GDP) estimates for 2016 from 3.3 per cent to 3.1 per cent.
Moody's has cut estimates for Indian GDP to seven per cent for 2015-16 from an earlier projection of 7.5 per cent, on the basis of a weak monsoon and slow reforms. Low crude (and low gas and coal prices) more or less guarantees that inflation will stay under control. The Reserve Bank of India has been bracing for crisis for quite a while and it has sufficient forex resources to defend the rupee, if required.
Domestic investors were fairly bullish until last week. Institutions continued to push money into the stock market. They have to, given the high inflows to Indian equity mutual funds. However, FII selling has also been very high. Advances massively outnumbered declines last week. Volumes also rose, which is a danger signal in a falling market.
The falling rupee could be a blessing for exporters, who have been suffering from lower volumes through the last three quarters. The traditional hedges of pharma and information technology have seen investment as the rupee has fallen. There has also been speculative interest in public sector banks due to the recapitalisation scheme where the government has committed to subscribing over Rs 70,000 crore. Sentiment may be adversely affected by the cancellation of airport privatisation.
But Indian economic data will be on the back burner so far as traders are concerned, as the market enters the derivatives and forex settlement. If the turmoil continues in China, Indian assets will almost inevitably get hit.
Technically speaking, the Nifty is precariously poised. It has broken below its simple 200-Day Moving Average. The return since January is near-zero. If support does not hold between the levels of 8,200-8,300, the breakdown might spiral into a deep bear market.
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
