The BSE Sensex dropped about 1,600 points from day's high, while the NSE Nifty looked poised to test the sub-25,000 level in a brisk selling on Friday afternoon amid fears Israel was planning a significant retaliation following Iran's missile attacks, widening the scope of the Middle East war. Sharp foreign outflows in October due to unattractive valuations and concerns over Brent crude oil prices that topped $78 a barrel level hurt sentiment, as investors chose to take some profit off the table amid geopolitical uncertainty.
There are fears that foreign investors are dumping Indian equities to invest in battered Chinese mainland market, given its reasonable valuations, and improved earnings outlook following stimulus measures announced by Chinese authorities. In contrast, Indian market valuations are deemed rich.
At present, Nifty is trading at 21.5 times its one-year forward earnings, which is above its historical average of 20.4 times. Against this, the MSCI China gauge is still trading at 10.8 times forward earnings, below its five-year average of 11.7 times.
"Despite the recent rally, Chinese stocks remain relatively undervalued compared to historical averages. For instance, Alibaba has seen a 37 per fcent increase and PDD a 48 per cent rise in the past month, and still they trade at P/E ratios of 26.5 times and 14.4 times, respectively, much lower compared to Infosys and TCS which trade at P/E of 30 times and 32.9 times respectively," said Viram Shah, CEO, Vested Finance. While these lower valuations may attract short-term capital, the long-term impact of the stimulus will depend on the Chinese government's further actions to tackle underlying issues, Shah siad.
In China, the central bank PBoC delivered a fairly substantial easing in the form of rate cuts, RRR cuts and liquidity infusion to support the equity markets. Monetary stimulus is estimated to be to the tune of 2 trillion yuan. As a next step, the Chinese government is looking at a fiscal stimulus the details of which could be released later in the month, with media reports indicating that the government could directly target measures to revive the weak links of the economy—private consumption and the property sector.
The Chinese policymakers have taken decisive measures to address the slowdown that is underway, said ICICI Bank in a note. "We think that the measures could create a floor to a slowdown but not drive a structural uptick in growth. We are subsequently maintaining our growth projections for 2024 and 2025," it said.
From day's high of 83,368.32, the BSE Sensex plunged 1,611.47 points to hit a low of 81,756.85, extending its recent fall to the fifth straight session. Nifty was trading at its day's low of 25,022.60. Mahindra & Mahindra, Bajaj Finance, Bharti Airtel, Asian Paints, Nestle India, Hindustan Unilever and Power Grid fell up to 3.3 per cent. IT stocks such as Infosys, Tech Mahindra, TCS and HCL Technologies bucked the weak trend, rising up to 1.8 per cent.
V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services said the recent selling in the market has more to do with FPI selling than fears of Middle East tensions escalating. "The last three days have witnessed huge FII selling of Rs 30,614 crores in the cash market. FIIs are moving money from expensive India to cheap Hong Kong on expectations that the monetary and fiscal stimulus being implemented by the Chinese authorities will stimulate the Chinese economy and improve earnings of Chinese companies. It remains to be seen how this Chinese recovery hopes play out," he said .
MOFSL said India's premium valuation has so far been supported by strong Nifty profit growth over the last one decade, a stable political environment with the BJP winning a third consecutive term, a GDP growth rate of 6-7 per cent; and strong macroeconomic indicators, including a stable currency, controlled twin deficits, peaking of interest rates, moderating inflation print, and massive development of digital and physical infrastructure.
The brokearge said it still remains constructive on the Indian market but preferred largecaps, as the valuations of midcap and smallcap indices are at a premium of 59 per cent and 12 per cent to Nifty-50, respectively.