Sensex Nears Bear-Market Zone as Indian Hotels Drags Mid Caps

  • BSE small-cap index extends worst weekly retreat since 2011
  • Foreigners withdraw $686 million from local shares this year

India’s smaller companies tumbled and the nation’s benchmark stock index approached a bear-market zone as concerns about slowing global economic growth dragged down Asian equities.

Indian Hotels Co. tumbled the most in 17 months after its third-quarter group net profit fell 84 percent from a year earlier. Wockhardt Ltd. extended last week’s 19 percent drop after saying the U.S. FDA made nine observations after inspection of its plant in Shendra, Aurangabad. Reliance Industries Ltd., owner of the world’s largest refining complex, and Bajaj Auto Ltd. were among the biggest decliners on the S&P BSE Sensex.

The S&P BSE SmallCap index tumbled 4.1 percent after capping its worst weekly loss in four years on Friday amid concerns about high valuations. The Sensex lost 1.1 percent, coming within a whisker of entering a bear market, as global funds withdrew a net $172 million of shares on Jan. 14, taking this year’s outflow to $686 million.

“There’s a clear case to take money out of mid-cap funds to dynamic asset-allocation or large-cap funds,” S. Naren, chief investment officer at ICICI Prudential Asset Management Co., India’s second-biggest money manager with $25.5 billion in assets, said in Mumbai. “Bulk of the selling is coming from foreign investors, who don’t own that many mid-cap stocks, but need the money.” The fund is overweight on private-sector lenders, utilities and automakers; and underweight on state-run banks and consumer staples.

Valuation Gap

The S&P BSE MidCap index is valued at 24 times reported profits and the small-cap index trades at 53 times, compared with the Sensex’s multiple of 18.3. The valuation gap leaves “room for further declines” in the smaller companies’ shares, Alex Mathews, the head of research at Geojit BNP Paribas Financial Services Ltd., said by phone from Kerala.

The worst start to a year for global stocks extended into a third week as oil sank to a fresh 12-year low. Brent crude briefly fell below $28 a barrel as Iran pledged to boost exports and Nomura Holdings Inc. predicted a potential drop to $25. The energy slump is fueling concern over disinflation, just as the U.S. embarks on tighter monetary policy and as anxiety over China’s management of its slowing economy rattles markets.

“As long as oil stays below $30 I don’t think there’s a rally coming in equities,” said Naren. “While crude is extremely beneficial for the Indian economy, the way it impacts equity markets is very different from the way its impacts debt markets."

Bear Territory

The Sensex has slid 18.5 percent from its January 2015 peak, nearing the 20 percent level that some investors consider bear-market territory. The gauge has erased nearly all gains recorded after Prime Minister Narendra Modi’s party swept to power in May 2014, as news out of China coincided with the waning of euphoria surrounding Modi’s economic agenda.

Indian Hotels slumped 4.5 percent, the most since August 2014. Wockhardt plunged 6 percent, taking this month’s loss to 21 percent.

Reliance Industries tumbled 5.3 percent, the most since Aug. 24. Bajaj Auto decreased 3.1 percent to its lowest level since Sept. 23. Asian Paints Ltd. retreated 3.3 percent.

The Nifty 50 Index lost 1.2 percent to close at 7,351 after taking support at 7,336 in last few minutes of trade.

“We expect the Nifty to stabilize at current levels before rebounding to 7,650,” Rajendra Wadher, director at PRB Securities Ltd., said by phone. “The 7,330 level is a strong support," he said.

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