MUMBAI – The Indian stock market is undergoing its toughest spell since the once-in-a-decade crash in March 2020. The benchmark indices are currently sitting more than 8 per cent off their record highs, the most since last November.
The threat of a new Covid-19 variant, sluggish rural consumption demand, squeezing corporate margins and anticipation of tightening of global monetary policy conditions have played a part in creating this situation. Most importantly, foreign investors have continuously downsized their exposure to the best performing emerging market since October.
“We are expecting a very volatile market. I would recommend caution. We are not expecting a Santa Claus rally,” Ajay Bagga, independent market expert, told ETNow on Monday.
The extent of the sell-off has been cushioned by the return of domestic institutional investors, who have poured in more than $4 billion into the market since the beginning of November, the highest inflow since March 2020.
Foreign investors have net sold Indian equities worth more than Rs 59,000 crore since the beginning of October due to extremely rich valuations and better investment opportunities in other emerging markets like China.
Lofty valuations of the Indian market at 23 times one-year forward earnings have also met with slowdown in earnings upgrade following the September quarter earnings season. While the Q2 earnings largely met expectations due to the low base of the year-ago quarter, the tremendous margin pressure seen across sectors has failed to justify the rich valuations investors ascribed to stocks.
Money managers suggest that earnings growth will come into acute focus next year in the absence of the easy-money policy of central banks. Corporate India is likely to face difficulties in sustaining the stellar growth of the current financial year due to the high base effects, unless the domestic economy picks up steam meaningfully.
With the volatility gauge, India VIX, up more than 50 per cent from its lows in October, analysts are justifiably concerned that Indian equities may remain stuck in their current rut till fresh triggers for upside come up.
“We expect sector rotation in the market to continue and defensives like pharma, IT, and consumer to make a comeback till sentiments improve,” Motilal Oswal Financial Services said in a recent note.
Brokerage firm Emkay Global Financial Services, too, has made tactical changes to its large-cap model portfolio to add more defensive sector stocks. The brokerage firm has raised the weights of insurance, IT and telecom sector stocks, while reducing the same for non-bank lenders, metals, oil and gas and consumer staples. “We do not think that consumer staples provide robust defensiveness given rural softness; input cost inflation; and elevated valuations, supported partly by lower bond yields,” the brokerage firm added.Internet Explorer Channel Network