Benchmark indices Sensex and Nifty, which were riding the bull run with solid 18-20 per cent returns this year till September, have taken a sharp U-turn, falling about 10 per cent from recent highs and, thus, entering into a correction mode. Blame it on huge foreign outflows amid a flurry of India Inc earnings downgrades post Q2 results, steep India valuations vis-a-vis other peer markets such as China and the Trump win in the US elections that has strengthened dollar and US 10-year bond yields, for now.
Sensex has lost 8,553.44 points, or about 10 per cent, from its record high of 85,978.25 hit on September 29. Nifty, on the other hand, has tumbled 2,744 points or 10.44 per cent over its one-year high of 26,277.35 reached on September 27.
For 2024 so far, FPI outflows from domestic primary and secondary markets combined together stand at $2,413 million. This is against outflows of $14,122 million seen in Taiwan and $3,606 million in Thailand. Korean and Indonesian markets have in fact seen FII inflows to the tune of $5,965 million and $2,025 million, respectively, Nuvama Institutional Equities suggested.
FPI holding of Indian stocks in fact hit a 12-year low last month and looked set to fall further as despite a slowdown in the pace, foreign investors have sold Rs 22,420 crore worth domestic equities in the first half of November against Rs 94,017 crore (primary and secondary market) outflows in the month of October.
One big reason for this trend has been earnings downgrades on Dalal Street. JM Financial on Thursday said 66 per cent of companies that it tracks saw EPS cuts for FY25 and 45 per cent of its stock universe saw cuts in target price post Q2FY25. Jefferies’ India office has cut FY25 earnings estimates for 63 per cent of the 121 companies under its coverage, the highest downgrade ratio since early 2020. MOFSL, in another note, earlier this month suggested some 166 MOFSL universe companies saw their earnings falling 8 per cent YoY. This was the lowest earnings in 17 quarters, it suggested.
"Weakness in Q2FY25 results and sustained outflow of foreign funds weighed on the market sentiment. A spike in domestic CPI inflation to a 14-month high of 6.2 per cent, a firm dollar index, and a rising US 10-year yield signal that the volatility will continue in the short term. Investors are rushing to unwind their positions in the riskier assets as the continuity of the premium valuation without a fair earnings growth will not be sustained," said Vinod Nair, Head of Research, Geojit Financial Services.
After the recent fall, the BSE Sensex is up 7.34 per cent in 2024 so far. China's Shanghai Composite is up 14 per cent year-to-date; Hong Kong's Hang Seng has gained 16.39 per cent while South Korea's Kospi has fallen 9 per cent during the same period. US index S&P500 has risen a massive 25.44 per cent this calendar. Dow Jones Industrial Average is also up 16 per cent.
Nair said the muted H1FY25 results have increased the scope of further downgrades in the FY25 Nifty EPS estimates. He is factoring in a 2-3 per cent further downward revision in the Nifty EPS estimate for FY25.
"Amid a setback in H1FY25, investors see some light in H2FY25 earnings on account of acceleration in government spending, a good monsoon, and a revival in rural demand. Consolidation may continue in the near term; however, the beaten-down value stocks may witness bottom fishing due to their potential outlook," he said.
Thanks to domestic flows, Nifty fell a mere 6.2 per cent in October despite record FPI outflows. The absolute cash balance for domestic MF schemes declined only by Rs 650 crore to Rs 1,67,500 crore for the month, Elara Securities noted. According to the exchange data, MFs purchased Rs 90,000 crore of equity in October, absorbing almost similar quantum of supply from FIIs.
Can domestic flows keep supporting stocks?
Domestic flows are necessary but no longer sufficient, said Ashish Gupta, CIO at Axis Mutual Fund. Gupta noted that the supply of equity in the form of IPOs and stake sales since FY24 has been 1.5 times the net inflow into mutual funds. The impact of this on the market direction was masked as FII flows over the last 18 months (April 2023 to September 2024) had been positive at over $35 billion, which aided in absorbing the increased supply.
Over 40 per cent of the IPO and QIPs raised during this period were subscribed by foreign inflows, he said in a note.
"IPO pipeline for 2H is nearly 3 times the amount raised in 1H with 91 companies looking to list and in aggregate raise $17 billion. Another 70 listed companies in recent weeks have taken board approvals to raise in aggregate $16 billion of equity through Qualified Institutional Placements (QIPs). Secondary stake sales from promoters and private equity is also only likely to grow larger given the expiring lock-ins and elevated trading multiples in the market," Gupta noted. Assuming secondary sales (by promoters and PEs) at $22 billion in H2 stays similar to what India witnessed in the first half, the total supply will rise to $55 billion in the second half of the year or about 2.5 times the estimated inflows in mutual funds, Gupta noted.
"Ensuring that equity supply will overwhelm domestic fund flows and market direction will again be subject to vagaries of foreign flows," he said.
Should investors be worried?
Jefferies views the recent stock market correction as healthy, most particularly as it has impacted the most expensive part of the market, while the relatively inexpensive private sector banks have started to outperform of late amidst expectations of a potential cut in the cash reserve ratio (CRR) by the Reserve Bank of India in coming months, it noted.
Morgan Stanley said the Indian market has compounded well over time in both rupee and dollar terms, ranking among the best performing stock markets worldwide over time.
"We expect returns to moderate given the starting point but remain robust. In our base case, Indian equities likely compound in low double digits over the coming decade. As we think the rate of rupee depreciation versus the dollar is likely to moderate, dollar returns are unlikely to be significantly different," it said.
Manoj Purohit, Partner & Leader, Financial Services Tax, Tax & Regulatory Services at BDO India said despite the ongoing outrage of funds since last month, this month saw an unprecedented applications of about 40-50 new FPI registrations which are eyeing to enter the Indian market.
"All thanks to SEBI’s recent relaxation to NRIs, permitting them to participate upto 100% and announcing measures for ease of entry and operations in India. Though FPI community had been very cautious about Indian markets in the last couple of months, shifting their allocation to other countries like China; India still stands on better footing as compared to other markets," he said.