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Published: November 15, 2024
Updated: November 15, 2024

Where Do Markets Go From Here ?

In the continuing mayhem on the Indian stock market, scrips across the India Inc board are facing a bearish embrace as sectoral indices of both BSE and NSE have continued their free fall since around a month before Vikram Samvat 2080 ended and the new Hindu religious year, Vikram Samvat 2081, began.

As a result, the BSE Sensex has crashed from an all-time high of 85,978.25 to 77,578.38, while Nifty50 has fallen from 26,277.35 to 23,518.30, leaving investors staring at a collective loss in wealth of Rs 33 lakh crore.

The factors behind this free fall have been dominated by foreign investors dumping a humongous Rs 1.25 lakh crore in Indian holdings to invest in a presently more attractive China.

Other contributing factor behind the flight of foreign funds include the return to the White House of an unpredictable Donald Trump and the continuing RussiaUkraine and Israel-Hamas conflicts

But the silver lining in this cloud of market gloom is that the bearish trend is likely to ease in 3-6 months and the market will once again chart an upward course.

Battered and shocked by the sudden slump in the stock market, retail investors in shares are an extremely worried lot. They have been caught unawares by the sudden dive in share values in the last two months, that too at a time when the markets were in a buoyant mood with benchmark indices scaling new all-time peaks every week. Suddenly, there was a selling avalanche touched off by over a dozen factors — including both domestic and global — and stock indices started tumbling down continuously, prompting bear operators to tighten their grip.

The highly popular benchmark index, the Sensex, based on 30 pivotal stocks quoted on the Bombay Stock Exchange, crashed from an all-time high of 85,978.25 (September 27, 2024) to 77,578.38 (November 19, 2024), while the darling of analysts, the Nifty50, based on the closing prices of the leading 50 stocks quoted on the National Stock Exchange, nosedived from 26,277.35 (September 27) to 23,518.30 (November 19). This widespread drop in values has led to a steep fall in market capitalisation, which has tumbled from Rs 463 lakh crore to Rs 430 lakh crore. This means that investors’ wealth has been eroded to the extent of Rs 33 lakh crore.

And this drop in stock prices is not sectorally limited – it covers a wide ange of sectors. The BSE Auto index has backtracked from 62,443.41 to 52,782.39, and the Nifty Auto index from 27,696.10 to 23,359. 50. Commodity stocks have suffered a sharp break in values with the BSE Commodity index down from 8,075.35 to 7,186.80 and the Nifty Commodity index slumping from 9,853.55 to 8,360.45. Banking and finance companies are no exception. The BSE Banker index has declined from 61,684.77 to 50,889.12, while the Nifty Financial Service index is down from 25,127.05 to 23,403.05. The Energy sector has also shed value, with the BSE Energy sector index moving down from 13,620.32 to 10,933.97 and the Nifty Energy index dropping from 44,665.85 to 36,584.20.

Information technology (with the BSE IT index dropping from 43,830.69 to 41,392.47), metals (with BSE Metals dropping from 34,535.64 to 29,788.07), and FMCG (with the BSE FMCG index declining from 24,084.04 to 20,616.34) have also tended to decline. Real estate has not been spared either, with the BSE Realty index dropping from 8,825.77 to 7,549.97.

WHAT'S AT PLAY

This widespread and sharp fall in share values is being attributed to a combination of several factors, which include:
(1) Market-related factors.
(2) Economic and political situation.
(3) Widespread selling by foreign investors.
(4) Global factors.

Foreign 'Ta-Ta': Let us first look at the most influential factor first -- the widespread and heavy unloading by foreign investors. During October and November 2024, the Indian stock market has witnessed a heavy sell-off to the tune of Rs 1.25 lakh crore by foreign portfolio investors (FPIs) and foreign institutional investors (FIIs). Unfortunately, domestic institutional investors (DIIs), despite their sizeable liquidity, have had neither the courage nor the inclination to stem the tide by investing heavily.

The prime driving factor for FIIs and FPIs offloading their Indian holdings is the concerted efforts by the Chinese government to revive a weakened national economy. Expectations of another stimulus package from China is said to be driving fund outflows from India to China, while FIIs also booked profits in October ahead of the US elections. Interestingly, DIIs appeared to be on the sidelines amid these major global events.

FIIs' persistent sell-off was also aided by Indian stocks' relative over-valuation and the attractive valuation of Chinese stocks. Again, there was a sharp rise in the US 10-year bond yield, mainly on account of strong job data and rising crude oil prices. Obviously, a stronger US yield induced foreign investors to re-apportion funds removed from risky emerging market equities to the safety of US bonds.

MSCI India has seen the highest foreign outflows in October among emerging markets, reflected by its negative return of 4.32 per cent in the MSCI EM Index, as per global index provider MSCI's data. The strengthening dollar and depreciating Indian currency have also aided FIIs' offloading.

FIIs and FPIs have been selling for the last six weeks and experts expect the offloading to continue for some more time.

Domestic situation: The political uncertainties in India have also aided the downtrend in the Indian stock market. After this year's general elections, Prime Minister Narendra Modi's position has weakened while the opposition parties have gotten stronger. In view of the question mark over political stability in the country, both foreign and domestic investors have turned extremely cautious and DIIs do not seem ready to invest heavily.

Economic Factors: The steady depreciation in value of the Indian rupee to an all-time low of Rs 84.50 against the greenback has prompted selling pressure in the Indian stock market.

Dull India Inc: The stock market's fortunes are directly linked to the performance of the corporate sector. The financial performance of India Inc in Q2FY25, ending September 2024, has been weaker than expected, raising investor concerns about the market outlook going ahead. "Earnings during the quarter have been a bit soft, largely driven by commodities, which is impacting the overall market sentiment at this point of time," comments Pankaj Pandey, head of research of ICICI Securitie.

Pointing out that the Indian stock market is facing headwinds from decelerating earnings, VK Vijaykumar of Geogit Securities adds that the Nifty EPS growth indicates that Q2 results may dip below 10 per cent in fiscal 2025, which will render the present valuations of about 24 times the estimated FY25 earnings difficult to sustain. Institutional investors may continue to sell in this difficult earnings growth environment, constraining any rally in the market.

US elections: In October, the market was reacting to US election-related nervousness. There was uncertainty about the outcome of the election as opinion polls indicated a tough fight between Republican candidate Donald Trump and Democratic candidate Kamala Harris. When the election results were announced and Donald Trump was declared the winner, the Indian market shot up. But the euphoria lasted for less than 24 hours as prices slumped the next day in anticipation of the new President's policies. Andrew Holland, CEO of Avenues Capital Public Markets Alternate Strategies, warns that the rough ride may continue if the US dollar and US treasury yields keep rising despite President-elect Trump's avowed objective of weakening the dollar. Experts fear that the recent strengthening of the dollar, driven by aggressive 'Trumponomics', is adding to fears.

Geo-politics: The market sentiment continues to be hit by the worsening geo-political scene. The Ukraine-Russia conflict does not seem headed for an ending and the environment has worsened after Russia threatened to use nuclear weapons. The Israel-Iran flare-up and the ongoing IsraelHamas conflict have led to fears of a world war. Thus, market sentiment is bound to be affected as economic and social life globally remains in a state of flux.

U.S. Fed policy: Stock market trends are directly influenced by interest rate policies. Regarding the US Federal Reserve's policy to cut the interest rate by 25 bps to 4.50% from 4.75%, Pankaj Pandey feels it could get negated because Mr Trump is talking of a good amount of spending. That means the fiscal deficit is going to be higher, which is why bond yields have jumped higher. This is not great news for the market.

As far as India is concerned, the Reserve Bank of India generally follows the cues of the US Fed. But this time it may not be possible as the inflationary price spiral is reaching sky-high levels and the RBI cannot take any steps to worsen the domestic situation. This means that the market's hopes of a cheap money policy will get delayed till inflation is contained.

The short-term market outlook in these circumstances is challenging. Says VK Upadhyay, AVP-Research at Master Capital Services, "The market remains below its 100-day EMA (Exponential Moving Average), adding to the bearish outlook. A hold above 23,500 (Nifty) could indicate bargain buying, while a sustained move above 24,500 may trigger short covering, signalling a possible end to the downtrend. Conversely, a decisive move below the 23,400 range could push prices down to below 23,000."

INVESTOR TIPS

What should investors do in these circumstances? Mr Vijaykumar recommends, "Investors can focus on areas of strength like digital companies and high-quality banking stocks." Mr Prashant Tapse, Senior VP (Research) at Mehta Equities, says, "Our preferred trades include selling Nifty CMP with targets of 23,450/23,467 and Bank Nifty at targets of 49,700/49,283. Stocks like Axis Bank, Voltas, NMDC and REC remain bearish on any intra-day trade. Sell REC at CMP of 502) with targets of 484/451, and an aggressive target at 408."

Mandar Bhojane, Research Analyst at Choice Broking, says, "Traders are advised to remain cautious and closely monitor global market developments. Key resistance levels should be observed for potential breakouts, while downside risks may continue to materialize if support levels are breached."

Undeniably, the recent market crash that started in October has left Indian investors so far poorer by more than half a trillion dollars, with the Sensex now down nearly by 10 per cent from its all-time high in September 2024, and the BSE market capitalisation dipping by about Rs 48.5 lakh crore (or $ 620 billion) to Rs 429.5 lakh crore.

On September 27, BSE's market cap was at an all-time peak of about Rs 478 lakh crore. At the then rupee-dollar exchange rate, the bourse's market cap was $ 5.7 trillion, which subsequently came down to $ 5.1 trillion.

As mentioned earlier, this massive slide in investors' wealth came on the back of relentless selling by foreign institutional investors (FIIs) and foreign portfolio investors (FPIs), touched off by US Presidential election-related uncertainties. Other factors were a sharp drop in the status of the ruling party in India, leading to fears of political instability, over-valuation of Indian stocks, and China's concerted drive to revive its weakened economy with stimulus packages.

Foreign investors felt it was more prudent to shift funds from India to China, where stock market values are highly attractive as compared to an over-inflated India. And foreign investors resorted to persistent selling. As a result, between October 1 and November 20, FPIs have offloaded stocks worth Rs 1.25 lakh crore, as per data from NSDL and BSE -- which translates to nearly $ 14 billion. No doubt, resourceful domestic institutional investors did jump in, but the amount was not adequate to stem the market fall.

BETTER DAYS

However, experts feel the selling pressure will ease after 3-6 months and the market will once again chart an upward course. The market capitalisation of the world's fifth largest market (in terms of market cap) will double in the next 5 to 6 years. According to Motilal Oswal, a leading brokerage house, by 2030 India's market cap will touch the $ 10 trillion mark.

According to the brokerage house, this growth will be driven by India's unique combination of economic size, sustained growth, and broadening diversity within the market. Going a step further, Gautam Adani, head of the Ahmedabad-based Adani group, has predicted that India is on track to be a $ 25-30 trillion economy by 2050.

In other words, though the short-term outlook for the Indian stock market is challenging, and the benchmark indices are expected to remain flattish for some time, the longterm outlook for India Inc, the country's economy and the growing population of Indian retail investors remains promising.