Synopsis: On August 2, Indian stock market benchmarks Sensex and Nifty 50 plunged over 1% each amid weak global cues, valuation concerns, geopolitical tensions, unimpressive Q1 results, and an overbought market. The selloff was broad-based, impacting mid and smallcap indices significantly.
The Indian stock market experienced a significant downturn on Friday, August 2, as major benchmarks Sensex and Nifty 50 both fell by over 1% in early trade. This decline can be attributed to a combination of factors, including weak global cues, valuation concerns, geopolitical tensions, disappointing Q1 results, and the overbought state of the market.
Weak Global Cues
The primary driver of the market downturn was the negative sentiment from global markets. Major indices in the US and Asia dropped following weaker-than-expected US factory data, which heightened concerns about the slowing economic growth. The Institute for Supply Management (ISM) reported that its manufacturing PMI dropped to 46.8 in July, indicating a contraction in the manufacturing sector.
V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, noted, "The drop in the ISM Manufacturing index to 46.6 spooked markets, bringing back recession fears in the US. The market, which has been soaring on the soft landing expectation, has turned nervous about the possibility of a US recession and its impact on the market."
Valuation Concerns
Valuation concerns also played a significant role in the market correction. The current PE (price-to-earnings ratio) of Nifty 50 at 23.5 is above its two-year average PE of 22. Similarly, the current PB (price-to-book value) of the index at 4.22 is slightly above its two-year average PB of 4.09. These elevated valuations have raised concerns about the sustainability of the market rally.
Vijayakumar added, "Fundamental support on the valuation front is not there. This year, Nifty 50 is expected to see earnings growth of around 15 per cent."
Geopolitical Tensions
Geopolitical tensions further dampened market sentiment. Recent escalations in West Asia, including the killing of Mohammed Deif, head of Hamas' military wing, in an Israeli airstrike, and the killing of Hamas' political leader Ismail Haniyeh in Iran, have raised fears of retaliatory actions and increased regional conflict.
Vijayakumar expressed his concerns, "Tensions in West Asia may get worse. Iran may retaliate, and aggravation of regional conflict is a likely scenario."
Unimpressive Q1 Results
The Q1 results of Indian companies have been mixed, raising doubts about the market's ability to sustain current valuation levels. According to Nikhil Ranka, CIO- Equity Alternatives at Nuvama Asset Management, "Q1 Earnings have broadly been neutral for markets with no major upgrades or downgrades to FY25/FY26 earnings estimates."
Overbought Market
The Indian stock market has been on a rapid upward trajectory, frequently hitting record highs. This has led to an overbought market, which was ripe for a correction. The market's swift 1,000-point rally in Nifty 50 from 24,000 to 25,000 in just 24 sessions needed a trigger for a pullback, which came in the form of weak global cues and rising geopolitical tensions.
Prashanth Tapse, Senior VP (Research) at Mehta Equities, noted, "The Indian market was in need of a reason to see a correction as it saw a swift 1,000-point rally in the Nifty 50."
Conclusion
The Indian stock market's decline on August 2 can be attributed to a confluence of weak global cues, valuation concerns, geopolitical tensions, unimpressive Q1 results, and an overbought market. Investors are advised to exercise caution and consider these factors while making investment decisions.
Disclaimer
The information provided in this article is for educational and informational purposes only. It is not intended as investment advice. Readers are encouraged to consult with their financial advisors before making any investment decisions. The author and the publication are not responsible for any losses incurred due to decisions based on this information.
