Domestic equity markets have been witnessing relentless sell-off with benchmark indices falling nearly 12 per cent from their 52-week highs, while the broader markets indices- BSE midcap index and BSE smallcap index- entering the bear grip, crashing up to 23 per cent from their recent highs.
However, despite this steep correction, Domestic brokerage firms Kotak Institutional Equities do not find much value in most parts of the market despite the recent sharp correction in the market. The Indian market may stay lackluster on the back of rich valuations across sectors and stocks, potential earnings downgrades and higher-for-longer global interest rates, it said.
The 3QFY25 results season did little to change Kotak's cautious view of the market. Most sectors and stocks are still trading at rich valuations, with the extent of overvaluation rising in inverse correlation to market capitalization, quality and risk, said Kotak.
The battle between FPIs and DIIs will likely continue in the next few months, with FPIs likely to continue with their cautious stance, given a challenging global investment environment for emerging markets and DIIs likely to deploy aggressively, given high cash positions with MFs and possibly strong (though tapering) inflows from retail investors, Kotak noted.
Provisional data available with NSE suggest that FPIs turned net sellers of domestic stocks to the tune of Rs 3,937.83 crore on Monday. Overseas investors have pulled out Rs 1.04 lakh crore from Indian equities in 2025 so far. On the other hand, domestic institutional investors (DIIs) turned net buyers of Indian equities to the tune of Rs 4,759.77 crore.
India’s macroeconomic position has deteriorated somewhat in the past few months, with a continued slowdown in consumption demand, reflecting the income and inflation challenges for the low income households, a likely slowdown in government capex and increased pressure on the external position, the brokerage said.
"3QFY25 results and management commentary showed a modest deterioration in the asset quality of banks, led by the MFI book of small finance banks and MFI-NBFCs, continued weakness in consumption demand despite some recovery in rural demand, but strong momentum in investment," it added further.
A number of brokerage firms including Kotak, Nuvama and Motilal Oswal believe that the December 2024 quarter was largely weak and those who missed the estimates were punished harshly. The weak 3QFY25 operating results again highlighted long-standing concerns around the street’s optimistic profitability and volume assumptions and (2) disruption threats across sectors, experts noted.
In a nutshell, Kotak expects the Indian market to likely see a diverse performance across caps, sectors and stocks in the next few months. Large-cap indices and stocks may be range-bound, while several midcap., small-cap. and ‘narrative’ stocks may see a sharper correction, it said.
"The Indian market faces headwinds from expensive valuations, likely earnings downgrades, higher-for-longer global interest rates and likely low interest in EMs among global investors," Kotak added.