The Indian stock market has faced notable upheavals recently due to a combination of geopolitical uncertainties, valuation concerns, and foreign investor outflows, which have weighed on market sentiment.
The Nifty50, India’s benchmark index, hit a record high of 26,277 on September 27, 2024, but it failed to sustain its momentum, closing at 24,399 on Wednesday—a drop of over 7%.
Global investment bank Goldman Sachs downgraded its outlook on Indian equities, shifting from an “overweight” to a “neutral” stance.
The bank cited a slowdown in India’s economic growth and its potential impact on corporate earnings as key reasons behind this decision.
According to Goldman Sachs, while a significant price correction may not be on the horizon due to strong domestic capital inflows, the market could face a period of “time correction” over the next three to six months, suggesting that stock prices may stagnate instead of sharply declining.
However, a section of market veterans are refraining from reading much into the correction, calling it “healthy” and even “overdue”.
Healthy correction or cause for concern?
Despite the recent pullback, many analysts believe that the correction is not only healthy but overdue.
Navneet Munhot, Managing Director and CEO of HDFC Asset Management Company, shared his views on the matter with CNBC TV-18.
“This was expected. This is a healthy correction. I think there was a point where the momentum had taken over where people were not discriminating between good news and bad news and stocks had to go up every day. This cannot continue,” Munhot said.
He added that a “sanity check” was necessary to bring the market back to a more sustainable level, with expectations of both time and price corrections moving forward before things get back to looking good.
Ramdeo Agarwal, Chairman of Motilal Oswal Financial Services, echoed Munhot’s sentiments, calling it the “healthiest possible correction” and emphasising that it was long overdue.
Agarwal noted that expectations for market returns had been unrealistic, with some investors expecting compounded monthly returns of 2-3%, which, in his view, is unsustainable.
He reminded investors of the long-term average annual return of around 14-15% in the Indian market and cautioned new investors against setting unrealistically high expectations that could lead to disappointment.
What about the steep corrections in mid and small caps?
While the broader market has declined, mid and small-cap stocks have been hit particularly hard.
Some stocks in these categories have dropped by 25-30%, leading to concerns that the correction may be too severe.
However, Gautam Shah, Founder of Goldilocks Premium Research, urged investors to keep the larger picture in mind.
In an interview with ET Now, he pointed out that many of these stocks had experienced substantial gains over the past year, with some doubling or even tripling in value.
According to Shah, a 25-30% correction is entirely normal following such significant rallies.
Shah also encouraged long-term investors to view these corrections as an opportunity to buy quality stocks at lower prices.
Stick to large caps, and if you are investing in midcaps and small caps, focus on top-quality companies.
He stressed the importance of discerning between quality stocks and speculative ones during periods of market volatility.
Are the high FII outflows mere “adjustment”?
One of the biggest contributors to the recent market volatility has been the large outflow of funds from foreign institutional investors (FIIs).
In October, overseas funds withdrew a net $7.8 billion from Indian equities, according to Bloomberg data, marking the largest monthly outflow since March 2020.
This sharp pullback comes as foreign investors react to India’s weakening economic data and rising inflationary pressures.
Manish Chokhani, Director of Enam Holdings, provided some context for the recent FII outflows.
Speaking to CNBC TV-18, he explained that foreign investors own around 15-16% of the Indian market, totaling approximately $800 billion.
He downplayed the significance of the outflows, noting that while FIIs have taken $10 billion home, they are not exiting the market entirely.
“They are tactically readjusting,” Chokhani said.
Ramdeo Agarwal shared a similar view, stating that much of the selling has been driven by tactical adjustments as investors rebalance their portfolios between China and India.
They are selling primarily for adjustment. The guys who are underweight on China and overweight on India, they are trying to balance that, and going back to China for a neutral way and coming back to India also for neutral way.
He added that the majority of these outflows have already occurred, with only another $2-3 billion left to go.
Agarwal does not foresee a crisis unless outflows related to China reach $25-30 billion, a scenario he considers unlikely at this point.
Analysts also feel the enthusiasm for Chinese markets is likely to be short-lived due to the structural problems in the economy.
“The FPI selling can continue for some more time. However, this is unlikely to sustain for long. This enthusiasm for Chinese revival is unlikely to last long because China has some structural problems. Even their fiscal stimulus is unlikely to continue beyond a point because the debt-to-GDP ratio is high and the government does not have money to stimulate the economy beyond the point,” said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
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