The Indian stock market benchmark equity indices, Sensex and Nifty, have witnessed sharp corrections in the recent past as disappointing corporate earnings, high valuations, and sustained fund outflows by foreign institutional investors (FIIs) soared investors’ appetite for riskier assets. At the current level, Sensex and Nifty50 are down over 10% from their recent peak in September 2024.
Given the market’s fragile condition, analysts remained divided on whether it is the right time to re-evaluate investment opportunities in the domestic stock market. While some believe that it may be a good idea to invest at the current levels in Indian equities as valuations have become more realistic after recent corrections. On the other hand, some brokerages opine that mid and small cap space may see further consolidations.
JM Financial in a latest report says this is the time to re-evaluate investment opportunities in India as valuations correct and analyst estimates become more realistic, as the nation is still the best long-term structural growth story. The brokerage argues that India is one of the fastest growing economies in the world and its gross fixed capital formation (GFCF) as a percentage of nominal GDP has risen for 4 years in succession. Adding to it, the domestic markets are supported by domestic capital flows, with SIP flows of ₹25,300 crore in Oct’24.
Given the continued SIP flows and “hopefully” a slowdown in FII outflows in the near future, it might not be a bad time to start investing in select stocks. According to the data, foreign investors have pulled out ₹22,420 crore so far in November, after withdrawing record ₹94,017 crore in October, which was the worst monthly outflow.
On FIIs outflow, the brokerage says that foreign investors may be heading back to United States amid growing optimism about growth of the world’s largest economy with Donald Trump coming back to power. The report highlighted that the sell-off in the Indian market started as a “Sell India, Buy China” trade post the Chinese government announcing stimulus measures for the economy in Sep’24. FIIs preferred moving to China (trading at less than half of India’s valuations. India’s 1-year forward profit-to-earnings (P/E) through Jul’24 to Sep’24 was > 1 standard deviation above mean). Consequently, China saw FII inflows of $96 billion in Sep’24.
“The results of the 2024 U.S. presidential elections indicate that Trump and the Republicans have gained control over all the three branches of the U.S. government. We believe Trump’s plans for lower corporate taxes, higher import tariffs, and deportation of illegal immigrants will result in growth in the U.S. economy, higher inflation, higher interest rates and a stronger U.S. dollar. This might tempt FIIs to take at least some portion of their money to the U.S.”
Meanwhile, Tata Mutual Fund in a report says that Nifty50 is currently valued at 20.6 times of its trailing 12-month earnings, following a 8-9% market correction and now moving into a consolidation phase. “FII rotation from India to China, as Indian markets were relatively more expensive. This shift may further impact flows into emerging markets like India. However, recent outflows represent only about 1% of foreign ownership in Indian equities,” the report notes.
The report also highlights that Q2 FY25 earnings season has underperformed expectations and corporate earnings in emerging markets may face further downward pressure while the U.S. is expected to do relatively better. “Earnings estimates for the current fiscal year have been cut by 50%, from 12% growth at the year's start to 6% as of early November 2024.”
“This trend toward consolidation resembles the period from November 2021 to March 2023, when the Nifty 50 was flat overall but saw significant internal movement. This reinforces our view that sectoral themes may underperform, with stock selection and execution remaining essential for returns,” read the report.
As per the report, mid and small cap space have high valuations, while large caps look relatively attractive from valuations and stability of earnings point of view. “We have been in a transition phase of controlling risk and profit booking by reducing weights within the mid and small caps and taking selective positions within the large cap space.”
Thematic sectors like Defense, media, energy, auto, manufacturing, real estate have fallen the most from the peaks in the recent correction and were the major retractors of returns, while sectors of banks, pharma, IT have been least impacted, the report noted.
Technically, 23650-23700 remains a strong resistance for Nifty, while 23800-24000 remains the sturdy hurdle for a trend reversal in the near period, says Osho Krishnan, Sr. Analyst, Technical & Derivatives of - Angel One. “On the lower end, 23400-23350 is anticipated to serve as an intermediate support level. Should this level be breached, there is a potential for further downward correction toward 23200-23100 in the comparable period.”
The analyst at Angel One says that the market seems volatile, and advised to avoid aggressive directional trade in the key indices. “Simultaneously, the technical setup portrays a bearish view, necessitating restraint from being influenced by transient pullbacks until there is evidence of sustained movement in our domestic markets. In the meantime, it is prudent to stay abreast with global developments.”
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