We have officially hit a bear market as the MSCI index closed down 20 percent from its high. Markets in Europe and Japan were down but a surge in oil prices helped the American markets rebound. The Sensex traded at 22986 on February 12, 2016 (down by 20 percent over the last year). It is also a time when PSU banks are not in the best health. While India has managed to maintain a growth rate of 7 percent and is still one of the most attractive destinations for global investors, the global worries are creating a panic. Here are four reasons why markets are trending low:
1. Sovereign wealth funds (SWFs) are in need of money. Most of these funds belong to countries which are dependent on export of oil or other single commodities. As oil prices are trading low, these countries are in need of funds. According to Reuters, oil producers sovereign funds hold $ 2 trillion of publicly listed equities worldwide and $ 700 billion is invested in European equities of which a quarter is in the banking system.
These funds do not make their holdings public. They are the main culprit of the entire rout in the equities market. Norway has the largest SWF with assets to the tune of $810 billion. SWFs have increased their exposure to Indian equities over the last three years. The Indian markets are in line with the international markets in the global sell off.
2. In Europe there are fears on the performances of banks. Deutsche Bank and Credit Suisse, two of the strongest banks are not in the best of their health where they will have to sell assets as part of restructuring. The premium or cost of protection on the debt in the credit default swap market is at the highest showing that investors are losing confidence.
3. A Bloomberg report says that losses to banks who were lending to energy firms are at an all-time high. European banks might face losses to the tune of $ 27 billion. European banks are down by 20 percent during the year. Banks across the world who have been lenders to this sector are facing huge losses.
4. Overall, people are worried about what is happening with China. The Chinese economy is not in its best form as GDP growth is not impressive. Chinese yuan investors want to invest into international markets as Chinese markets do not have much to offer in terms of returns. But as investors start buying into another currency, it puts a selling pressure on the Yuan. As the yuan depreciates, more people put their money abroad. China now plans to sell its international assets which include the US bonds to buy the yuan. All this is leading to a negative lookout for overall markets.