Indian stock markets have taken a significant hit over the last couple of months, raising concerns about the possibility of a bear market. The Nifty 50 index is now down by around 10% from its 52-week high, and the Sensex has lost more than 8,000 points since its peak in September. As the markets continue to slide, questions are mounting about whether this is just a temporary correction or the beginning of a deeper downturn.
Headline Indices Under Pressure
The Indian stock markets have shown signs of stress recently, with both the Nifty and Sensex down significantly from their highs. The Sensex, which hit its 52-week high of 85,978 on September 27, has now dropped below the crucial 78,000 mark, shedding more than 1,000 points in a single day. Similarly, the Nifty, which reached its peak of 26,277, is now hovering around 23,500. This represents a 10% drop from its recent highs, a move that is often seen as a precursor to a more prolonged downturn.
For the markets to officially be considered in a bear market, a 20% drop from the peak is typically the threshold. However, while we are not yet in bear territory, the mood on Dalal Street is decidedly cautious. In fact, many retail investors are already feeling the impact, as more than 900 stocks with a market cap of over Rs 1,000 crore have fallen by at least 20% from their 52-week highs. This suggests that the pain is not limited to the headline indices, but is widespread across sectors.
🚨Sensex and Nifty plunge over 800 & 290 points extending monthly market losses. FII outflows, weak earnings, and inflation data weigh on markets.
#stockmarketcrash #stockmarketnews #StockMarketIndia #sensex #nifty #FII #DII #stockmarketscrash pic.twitter.com/A7p6UsCs3e
— Aditi R. Minglani (@aditiminglani) November 13, 2024The Role of Foreign Institutional Investors (FIIs)
One of the key reasons behind the current market weakness is the continued outflow of capital from foreign institutional investors (FIIs). Since October, FIIs have pulled out a record Rs 1.2 lakh crore from Indian equities. This is part of a broader trend where investors are shifting their focus to other markets, particularly China, which is offering relatively lower valuations and stimulus measures to support growth.
The selling pressure from FIIs is compounded by a stronger US dollar and rising bond yields in the US. The 10-year US bond yield has spiked to 4.42%, which makes US assets more attractive compared to emerging market stocks, including those in India. As a result, more money is flowing out of India and into the US, adding to the downward pressure on the stock market.
Weakening Earnings Outlook
Another factor contributing to the current market correction is the dismal earnings performance in the recently concluded Q2 earnings season. Companies across various sectors have reported weaker-than-expected results, leading to downgrades in earnings forecasts. The number of downgrades has been the highest since early 2020, which has raised concerns about the sustainability of corporate profits, especially given the elevated valuations in the market.
While domestic institutional investors (DIIs) remain positive on the long-term India growth story, the short-term outlook has become more uncertain. The combination of slower-than-expected earnings growth and FII selling is likely to keep the markets in a consolidation phase for the next few months, according to analysts.
Global Economic Concerns: Rising Dollar and US Yields
The rising dollar index and the sharp increase in US bond yields are creating additional challenges for emerging markets like India. The dollar index surged by 1.8% in November, reaching a high of 105.98, the highest level since July. This has put pressure on emerging market currencies, including the Indian rupee, which is also facing volatility. The rupee recently touched a historic low of 84.40 against the US dollar, weighed down by persistent FII outflows and a strong dollar.
The surge in US bond yields to 4.42% has also raised concerns. As yields in the US rise, foreign investors are more likely to move their capital to the US for higher returns, further draining liquidity from emerging markets. This creates a headwind for Indian stocks, which are already grappling with weaker earnings and valuation concerns.
Sector Performance: The Pain Across the Board
The recent market slide has been broad-based, with almost all major sectors underperforming. On November 13, the Sensex and Nifty indices both saw sharp declines, and the broader markets, including the Nifty Midcap and Nifty Smallcap indices, performed even worse. The Nifty Realty index was the worst performer, shedding 2.66%, followed by the Nifty Metal index, which lost 2.2%. The Nifty Auto and Nifty PSU Bank indices also dropped sharply.
Among individual stocks, Tata Steel, Mahindra & Mahindra, JSW Steel, Adani Ports, and PowerGrid were among the top losers. On the other hand, only a handful of stocks in the Sensex pack managed to stay in the green, including NTPC, ITC, Tata Motors, Titan, and Hindustan Unilever.
Analysts suggest that some sectors, such as cement, metals, and petroleum refining, are facing growth slowdowns and may continue to underperform in the near term. On the other hand, sectors like banking, IT, pharma, and new-age digital companies are likely to show stronger growth prospects, making them safer bets for investors during this volatile phase.
Outlook: Short-Term Pain, Long-Term Gain?
Despite the short-term volatility and the risks associated with the FII selling and global economic headwinds, some analysts remain optimistic about the long-term prospects for Indian markets. Meeta Shetty, Fund Manager at Tata Asset Management, believes that while Q3 earnings may not be strong, there is hope for a recovery in Q4 as infrastructure projects gather momentum and fiscal spending increases.
In the near term, however, the market may remain under pressure, with further mild adjustments expected through Q3. The Nifty is currently trading near its 200-day moving average (DMA), which is a technical level that could act as a support point around 23,500. Analysts suggest that a relief rally could be possible, though midcap and small-cap stocks may face additional downside risks.
Brace for Volatility
The current market correction is a reminder of the inherent volatility in Indian equities. While the broader market may not yet be in a bear market, there are enough warning signs to suggest that the near-term outlook remains uncertain. Investors should remain cautious, especially in sectors facing headwinds, while keeping an eye on fiscal policy developments and global economic trends.
For long-term investors, this could present an opportunity to buy quality stocks at more reasonable valuations. However, short-term volatility is likely to continue, and it may take a few months before market sentiment fully stabilizes. The road ahead will require careful navigation, but for those with a long-term horizon, the India growth story remains intact.
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