Synopsis: The Indian stock market, characterized by record highs in early 2024, has witnessed a sharp correction due to factors like foreign fund outflows, quarterly earnings downgrades, and shifts in global financial conditions.
Sensex and Nifty Corrections Amid Global Market Dynamics:
The Indian stock market has faced a notable correction after an impressive start to 2024. Benchmark indices Sensex and Nifty, which offered returns between 18-20% till September, have taken a downturn, each falling by around 10% due to a series of macroeconomic and corporate earnings pressures.
This downturn aligns with broader market corrections worldwide, albeit with varied regional performances.
While the BSE Sensex remains up 7.34% for 2024, indices like China's Shanghai Composite and Hong Kong's Hang Seng have recorded year-to-date gains of 14% and 16.39%, respectively, while South Korea's Kospi has declined 9%.
The United States' S&P 500, by comparison, has surged a substantial 25.44% this year, underscoring divergent market performances across regions.
Foreign Outflows and Market Performance:
Foreign portfolio investors (FPIs) have withdrawn over $2,413 million from Indian markets in 2024, driven by concerns over steep domestic valuations and global economic factors such as the strengthening U.S. dollar and rising U.S. bond yields.
In contrast, other Asian markets have experienced mixed FPI impacts, with Taiwan and Thailand also witnessing outflows of $14,122 million and $3,606 million, respectively, while South Korea and Indonesia recorded inflows of $5,965 million and $2,025 million.
Indian stocks have reached a 12-year low in FPI holdings, compounded by a 10% market pullback from their highs in September.
The impact of weak earnings results, as highlighted by downgrades across numerous companies, reflects investor apprehensions.
Analysts, including JM Financial, reported that 66% of tracked companies faced EPS cuts, while Jefferies reported the highest downgrade ratio since early 2020 for 63% of its covered entities.
In another assessment by MOFSL, 166 companies posted their lowest quarterly earnings in 17 quarters.
Domestic Market Resilience and Challenges:
Despite record FPI outflows, domestic mutual funds have shown resilience, cushioning some of the impact on Nifty, which only fell by 6.2% in October.
Mutual funds absorbed substantial equity offerings, with net purchases totaling approximately Rs. 90,000 crore.
However, some analysts like Ashish Gupta of Axis Mutual Fund suggest that domestic inflows alone may not suffice to offset the ongoing equity supply, especially given the surge in IPOs and Qualified Institutional Placements (QIPs).
Gupta pointed to an equity supply-to-demand imbalance, with IPO and QIP offerings tripling in the second half of 2024, potentially further straining market stability if foreign interest does not resume.
Outlook for Investors:
The recent market correction, as Jefferies noted, is deemed "healthy," potentially realigning valuations, especially among high-priced sectors.
Relatively lower-valued sectors, such as private sector banks, have shown resilience, supported by expectations of an RBI cash reserve ratio cut.
Morgan Stanley remains cautiously optimistic, forecasting moderate but stable long-term returns for Indian equities.
Manoj Purohit of BDO India highlights a recent surge in foreign portfolio registration applications, largely thanks to SEBI's recent regulatory ease for foreign investors, suggesting that foreign investment interest may regain momentum.
In conclusion, India’s stock market faces a phase of recalibration amid domestic and international pressures.
The combination of large foreign outflows and weaker corporate earnings has affected sentiment, although domestic inflows from mutual funds have provided a temporary cushion.
The outlook is mixed: while valuations may stabilize through recalibrations in high-priced segments, sustained growth depends on revitalizing foreign investments.
Factors like SEBI’s regulatory reforms and prospective macroeconomic adjustments may influence market direction in the near term, offering cautious optimism for long-term investors.
Disclaimer: This article provides stock market information for informational purposes only and should not be interpreted as investment advice. Readers should consult with a qualified financial advisor before making any investment decisions.
