Equities have further to fall

Indian equities have dropped by over 3% so far in July (see Chart 1), even as most other Asian equities have held up reasonably well this month. The drop appears to have been triggered by proposals in this month’s union budget for FY19/20 which would subject foreign portfolio investors registered as trusts to higher taxes. Looking ahead, we think that further falls in local equities are likely. Despite the recent drop, valuations of Indian equities are still stretched compared to other emerging markets. In addition, we think that a continued slowdown in the US will cause the S&P 500 to slump and investors to retreat from risky assets generally. In all, we are forecasting another 10% fall in the Sensex from where it is now, to 35,000 by the end of the year.