Why Sensex tumbled 540 points

When trading began in European markets on Tuesday, the 30-share BSE Sensex took a nosedive. Till then, markets across Asia traded flat. The fall is attributed to dramatic events unfolding at Volkswagen, the second-biggest carmaker in the world. The company admitted to cheating on emission tests in the US as shares tumbled 20%. 

Why should this affect Indian shares 

Foreign institutional investors have been active sellers in the Indian market in September 2015. Over the past two days, they turned net buyers. FIIs control a sizeable chunk of Indian shares held by non-promoters. This is commonly called the free float. In August, FIIs pulled out close to $ 3bn from Indian equities. So far in September, they have pulled out $ 1bn. Their activity in the stock market has an immediate impact on Indian shares. If the overall sentiment is not in favour of equity markets, Indian shares are expected to follow the trend around the world. 

What are headwinds ahead 

Indian shares are unlikely to witness any significant rally till the time investors see a possibility of an upswing in corporate profits. According to one analysis by Kotak Securities, about 40% of the net profit of BSE 30 and NSE Nifty indices is linked to the GDP growth in India. This means a sizeable chunk of companies that form the two indices rely on growth prospects of the Indian economy. The Asian Development Bank cut India’s growth forecast for 2015-16 to 7.4% from 7.8% earlier. Overall global growth is unlikely to remain strong going forward. The slowdown in China and lack of demand in the Eurozone could mean overall prospects for profit growth of Indian companies are not so bright. 

Valuation expensive 

As shares across markets fell, Indian shares remained resilient. They did not fall as sharply as those in other emerging markets like China, Brazil or South Africa. The relative resilience of Indian shares in 2015 means that the valuation of Indian shares is more expensive than other markets. While investors are willing to pay 10 rupees for every rupee profit of emerging market companies, they have to shell out 13 rupees in India. This is because there is an expectation Indian companies are expected to grow profits faster than in other countries. However, the worry is that due to slow growth, profits may not grow as fast as expected.

Happy Investing

Source:Yahoofinance.com