Redemption-pressured selling of Indian shares by foreign investors are expected to continue in the coming week, with US jobs data leaving the door open for a possible rate increase by the Federal Reserve this month. A US rate rise, which would be the first since 2006, would accelerate cash flows to America and dampen risk appetite in much of the world.

For emerging stock markets, reeling under China’s economic slowdown and falling currencies, the near-term outlook is weighed down by gloomy forecasts for growth. India’s economic expansion rate is on track to top the world table for major economies this year, but the growth is seen lower than expected earlier.

The big risk factor that is overwhelming the markets in India is twofold: Although India’s nearly $2 trillion economy is primarily driven by domestic demand and hence is better placed to weather the global trade slowdown than export-driven countries, a majority of companies that comprise the 50-share Nifty index get their revenue in foreign currencies.

“The Indian economy is relatively less affected by global growth concerns. However, the larger listed space is not as immune, with 51 per cent of Nifty revenues not in rupees,” analysts at Credit Suisse said in a report.

“Even the 49 per cent that is in rupees includes bank revenues that are exposed to metal companies with weak balance sheets. In fact, even the recent sharp cuts in Nifty EPS are driven mostly by global factors.”

The second major factor is the large foreign fund ownership in blue-chip companies, making them vulnerable to global swings. Investors in funds have become risk averse globally and redemptions are driving fund managers to sell stocks in markets that are better off to make up for losses elsewhere.

Sovereign funds

According to brokers, sovereign funds of oil-exporting countries were among those pulling out cash. The slump in oil prices has taken a heavy toll on the revenues of oil-rich nations.

Neelkanth Mishra, managing director of Credit Suisse in India, reckons that at current oil prices, the combined current account of oil producers moved from a surplus of $400 billion to a deficit of $100 billion, a swing of half a trillion dollars.

“Flows from them may be reversing, not just slowing, likely explaining the redemption-type selling seen lately. Just as they were ‘price-insensitive’ buyers on the way in, they are ‘price-insensitive’ sellers on the way out,” he said in a blog.

Foreign funds have dumped stocks worth more than $2.5 billion over the past few weeks, and there could be more offloading in the weeks ahead. The top-30 Sensex fell 4.5 per cent in its worst weekly loss in nearly four years. At 25,201.90 on Friday, it was the widely tracked benchmark’s lowest close since July last year.

“When an emerging market fund sees redemptions, it would sell all the markets it has positions in. It could choose to sell what it can, and not what it should. So, India being relatively better off fundamentally could see a somewhat higher share of selling. Selling of passive index-tracker exchange-traded funds also increases risks on stocks whose fundamentals may be sound, but that would still see selling pressure,” Mishra wrote.

“In the medium term, these will turn into opportunities. The problems of fund-flow plumbing should help accelerate India becoming an asset class by itself. But that is unlikely to be fast enough to avoid near-term turbulence.”

US rates watch

China’s slowing economy and its frantic efforts to prop up falling exports by devaluing the yuan currency has worsened the plight of emerging economies that either depend upon or compete with Beijing for markets. The tumble of commodity prices has dented the economies of resource-exporters such as Brazil, South Africa, Russia and Australia.

Global growth is also under strain because of Beijing’s problems as well as travails elsewhere. Europe continues to battle Greece’s debt crisis, and political issues in the Middle East have triggered a refugee influx.

Against this background, with global risk appetite at low ebb, a US rate rise could have repercussions across the world. Data on Friday showed US payrolls rose less than expected in August, but a drop in the unemployment rate to a near 7-1/2-year low of 5.1 per cent and rising wages were seen as ammunition for votaries for a rate rise.

Jeffrey Lacker, president of the Federal Bank of Richmond and a known hawk, believes it’s time to end the era of record-low interest rates.

“I am not arguing that the economy is perfect, but nor is it on the ropes, requiring zero interest rates to get it back into the ring,” he said in a prepared speech in Richmond. “It’s time to align our monetary policy with the significant progress we have made.”

Comments such as these would set the tone for Indian stocks when trading resumes on Monday. The Fed’s rate-setting committee is set to meet on September 16-17, and speculation on its outcome would be the main driver for markets worldwide.

For India, there will be something to cheer later on. The Reserve Bank of India is likely to cut rates on September 29 when it is scheduled to meet for a monetary policy review, or it could make the move even earlier thanks to benign inflation and lower-than-expected growth outlook.

Sensex outlook

Many brokerages have lowered their forecast for the Sensex, citing earnings worries and fund outflows. Deutsche Bank trimmed its call to 31,000 by December-end from 33,000, while Citigroup cut to 32,200 from 33,000.

ICICI Securities set its target for the benchmark at 30,300 by September next year, which is about 20 per cent up from Friday’s close. “Going ahead, we expect Sensex EPS to grow at 13.2 per cent and 18.5 per cent in 2015-16 and 2016-17 to Rs. 1,539 and Rs. 1,838, respectively,” the brokerage said in a note.

It also recommended investors to buy five stocks: Pidilite Industries, a dominant player in adhesive and industrial chemicals market; utility vehicle leader Mahindra & Mahindra; bearings maker Timken India; Bharat Forge, a major supplier of automotive forgings to the world market; and Voltas, an assembler of air-conditioners.

The writer is a journalist based in India.