After a 10% fall in 7 weeks, the market trajectory still a cause for worry amid foreign selling

While relentless foreign selling which has continued for 33 consecutive sessions is still continuing, market experts don’t rule out the possibility of another 5-10 per cent correction in the coming weeks.

The big fall:

Stock market has fallen ten per cent with the Sensex plunging 8,398 points from the all-time peak of 85,978.25 recorded on September 27 this year to 77,580.31 by Thursday, November 14. Nifty Index fell for six out of the past seven weeks as earnings from India Inc continued to weigh on investors’ sentiment at a time when increase in safe–haven assets like the dollar index, and US treasury yields weighed on risk assets like emerging markets’ equities, said Deepak Jasani, Head of Retail Research at HDFC Securities.

“A combination of persistent inflation, high interest rates, raised taxes on capital gains and stock markets, slowing private consumption expenditure and downgrades to corporate earnings outlook, all combined to make the lofty valuations of the Indian markets look very frothy,” said market expert Ajay Bagga.

More correction on cards?

Some experts are expecting more correction in the market. “Given that the trailing valuations of Nifty 50 are still elevated at 21.7x, we cannot rule out further correction of 5-10 per cent going forward as we are seeing slowdown in domestic consumption and earnings downgrades by analysts,” said Vineet Sachdeva, Entrepreneur Partner-Quantitative Equity Investing, Alpha Alternatives

“The expensive valuations are on the back of strong DII flows through SIPs, which have largely been targeting small and mid-cap funds. If the retail flows reduce, we can see deep corrections in this space, which could be severe,” he said. “Our advice to investors would be to stick to their asset allocation and not panic. Within the asset allocation framework, for their equity allocation, they should stick to large caps and quality mid – and small caps with businesses that have the proven ability to withstand tough times.”

“We feel another 5-10 per cent fall may be possible, but the higher probability is for a recovery to set in by December-end to January in anticipation of the Union Budget 2025-26,” Bagga said.

One plus point for the market is that domestic funds and institutions are big-time buyers in the market, accumulating stocks worth over Rs 1.30 lakh crore since October this year. Moreover, the history of stock markets in the last 25 years shows that the market has always bounced back when the cycle changes and the economy pick up again.

Aditya Birla Sun Life AMC Ltd Managing Director & CEO A Balasubramanian said that the 10 per cent fall in the market has made valuations reasonable. However, there is a need to be cautious for some more time. He said going forward the correction in the market would be much slower.

FPI sell-off:

A major reason for the sustained fall in the market is sell-off by foreign portfolio investors (FPIs). FPIs have pulled out over Rs 1.41 lakh crore from the cash market since October 1 this year, triggering the 10 per cent fall in the market since all-time peak in September this year.

Huge investment by domestic institutional investors (DIIs) prevented a big crash in the market in October. However, the latest stimulus announced by China is weighing on the market sentiment. “The trend of sustained FPI selling which started in early October continues and is showing no signs of reversal any time soon. The current wave of FPI selling was triggered by the Chinese stimulus measures and the cheap valuations of Chinese stocks. The elevated valuations in India made India the top choice of FIIs to sell,” said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

This (FPI sell-off) was primarily on account of expensive valuations in India, reallocation of funds to China, and optimism about US markets, according to Vineet Sachdeva.

Rate cut hopes fading:

The latest worry of the markets is high retail inflation and fading rate cut hopes in India. India’s inflation touched 6.2 per cent in October, the highest in 14 months. “We expect November inflation numbers are likely to be closer to 5.3 per cent and the average FY25 inflation numbers are now trending at 4.8 per cent-4.9 per cent, against the RBI’s 4.5 per cent. Inflation is only likely to dip from January onwards, but this will be driven by base effects. “We are now less hopeful of a February rate cut. We believe the first rate cut is now effectively pushed back beyond February 20,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.

“With the currency market being subject to turbulence, we believe a higher inflation number could act as a blessing in disguise for RBI not to signal a rate easing cycle,” Ghosh said.

Corporate performance lacklustre:

Adding to the market woes, India Inc’s profitability is under pressure amid worries about a slowdown in consumption. The story line of corporate performance for the second quarter of FY25 is all about higher growth in expenses even as sales growth remained largely stable. Leading corporates like Reliance Industries and Hindustan Unilever reported a decline in second quarter profits.

According to a Bank of Baroda analysis based on the financial results of 502 companies, growth in profit after tax declined to 4.1 per cent in the second quarter ended September 2024 as against a growth of 37.8 per cent in the same period a year ago. However, sales growth improved marginally to seven per cent from 6.8 per cent a year ago.

“Excluding banks the growth in sales was 5.7 per cent. Growth in expenses were around 10 per cent for both the sample sets. Growth in net profit was low partly due to higher growth in expenses and the high base effect,” said Madan Sabnavis, Chief Economist, Bank of Baroda.

US elections:

Analysts says Asian economies are also likely to feel the heat from US election results, contingent on the degree of trade and investment linkages with both counterparties, i.e. US and China. India is not immune but is relatively better placed amongst its Asian peers in the event of heightened tensions between China and the US. The first line of impact will be passthrough of financial market volatility, with sharp swings in US treasury yields as well as the dollar likely to pile pressure on the Indian assets/ flows. The rupee has hit new lows in the past week on the back of the post-election USD rally. “With China’s CNY assuming the largest weight in India’s total trade basket, authorities are likely to align rupee’s movements to the yuan as well. Heightened market volatility might also lead the RBI to prioritise financial stability and guard against imported inflation, delaying its easing cycle,” said Radhika Rao, Senior Economist and Executive Director, Group Research, DBS Bank.

On the real economy front, a hostile geopolitical environment, inward looking trade policies and consequent deceleration in global trade/ investment activity will impact Asia’s growth ambitions. India’s export and investment linkages run deeper with the US rather than China, Rao said.