Nifty 50’s 5% fall in Oct marks worst monthly show since COVID market crash. What’s ailing

Indian markets, which surged without significant pullback through the first nine months of 2024, capturing global attention with record-breaking highs, are now facing a stark reversal.

Once dominating the headlines for their upward momentum and milestone-breaking rallies, the Indian front-line indices are now in focus for a different reason—hitting multi-month lows as bearish sentiment takes hold.

What was once a market where investors eagerly bought every dip has now transformed, with investors choosing to sell into rallies instead. In recent instances, every time stocks have attempted a rebound, investors have been quick to seize the opportunity to sell, driving prices down to new lows.

Amid this backdrop, the Nifty 50 has plunged 5.40% in October so far, marking its largest monthly drop since March 2020, when the COVID-19 pandemic was at its peak. After reaching its all-time high of 26,777 in late September, the index has undergone a correction of 7%, reflecting the bearish sentiment that has gripped the market.

Throughout the 16 trading sessions in October, the Nifty 50 has closed in the green only four times. Notably, the index posted losses exceeding 0.5% on four occasions, with the worst session occurring on October 3, when it tumbled by 2.2%. The last time the index gained more than 1% in a single session was on September 20.

Notably, the downward pressure in October has been largely confined to Indian equities, while Asian stocks continue their upward momentum. Meanwhile, U.S. markets have been rallying sharply, reaching new record highs, driven by strong corporate earnings and robust economic data.

Earnings shortfall sparks market jitters

Several factors have contributed to the recent sell-off in the market, however, the weak earnings reported by companies for the September quarter so far have been the primary catalyst. The relentless rise of Indian stocks during the first three quarters of the calendar year has driven them to expensive valuations that are comparatively high on a global scale.

To justify these elevated multiples, companies need to deliver strong earnings. Unfortunately, the majority of firms that have reported their results for the September quarter have fallen short of street estimates. This underwhelming performance has likely fueled investor concerns that the reported financial results may no longer justify current stock valuations.

In addition, slowing consumer demand, as evident by the recent decline in auto and FMCG sales, especially in urban areas, amid weakening consumer spending and rising commodity prices, has raised concerns about the potential impact on company earnings in the upcoming quarters.

Analysts have been warning about the unsustainable valuations of Indian stocks, suggesting that a correction is imminent. They point out that the market has not witnessed any substantial pullback since the COVID-19 pandemic.

Despite the recent pullback in stocks, analysts remain sceptical about current valuations, as they believe most stocks are still trading at expensive levels. In a recent note, domestic brokerage firm Kotak Institutional Equities expressed concerns about the market’s valuation landscape, stating that prices are exceedingly high across most sectors.

It highlighted that the multiples for nearly all sectors—excluding banks—are well above their pre-pandemic levels. The brokerage maintained a cautious outlook on the market, even after the recent correction. It emphasised that many areas of the market continue to trade at full or frothy valuations, suggesting a lack of genuine value based on traditional financial metrics.

Kotak also noted that this lack of value stems not only from overly optimistic growth and profitability assumptions—often retrofitted to justify rising stock prices—but also from the fact that relative valuations lose significance when nearly all stocks in a sector are trading at inflated levels.

FPIs’ selling in Indian stocks hits ₹92,000 crore

Overseas investors are adjusting their portfolios by pulling funds from Indian stocks and reportedly shifting to China, where they are seeking to capitalise on more reasonable stock valuations, bolstered by Beijing’s recent stimulus measures. The country is taking notable measures to achieve its goal of 5% economic growth for 2024. 

These initiatives have drawn investors back to one of the world’s most-severely hit markets, offering new opportunities for potential growth.

So far in October, Foreign Portfolio Investors (FPIs) have withdrawn a record ₹92,143 crore from Indian equities, according to data from Trendlyne, marking the largest monthly outflow on record. The previous highest outflow occurred during the pandemic in March 2020, when FPIs sold ₹65,816 crore worth of Indian stocks.

FPIs have been consistent net sellers throughout every trading session this month, with the biggest single-day outflow recorded on October 3, when they pulled out ₹15,506 crore. Despite this, domestic institutional investors (DIIs) have absorbed much of the FPI selling, preventing a more significant market correction.

In addition to the attractive valuations of Chinese stocks, the outflows in October can be attributed to several other factors, including rising tensions in the Middle East, fading hopes for a larger rate cut by the U.S. Federal Reserve in its upcoming November policy meeting, and increasing crude oil prices.

Adding to these uncertainties, Goldman Sachs Group downgraded Indian equities from ‘overweight’ to ‘neutral,’ citing slowing economic growth, according to recent media reports. The group had upgraded Indian stocks to ‘overweight’ late last year, highlighting earnings growth despite global macroeconomic challenges. However, weak earnings reports from companies for the September quarter have made them more cautious about Indian stocks.

Goldman Sachs analysts expressed concerns over high valuations and warned that a less favorable economic environment could limit near-term gains for local shares. They also lowered their 12-month target for the Nifty 50 Index from 27,500 to 27,000, implying a 10% upside from Tuesday’s close.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.