Stock analysts believe the broader market is technically oversold now, and if one goes by history, a recovery is in the offing. However, weak earnings growth and high valuations in India could still play a spoilsport, they warned.
Data showed the advance to decline ratio for BSE-listed stocks have fallen to 0.75 in February, with 1,906 stocks advancing against 2,548 declines. This is the worst ratio since September 20218's 0.73. The advance to decline ratio was as high as 1.4 in April 2023, BSE data revealed.
Add to that, the market breadth has approached the bearish extreme, as percentage of Nifty500 stocks above 50- and 200-day SMAs hit their bearish extreme of 13 and 5, respectively, last week. Historically, such bearish readings have paved the way for durable bottom in subsequent weeks.
"Past two decades data suggest that the weekly RSI below 30 suggest oversold condition for the Nifty midcap and small cap indices. Which have been tested only on six occasions, resulting into 20 per cent up move in subsequent three months, wherein drawdowns have been limited to 5 per ecnt. With recent reading of 33 we believe; the risk reward remain favorable as pullback from bearish extremes cannot be ruled out," ICICI Securities noted.
Nomura India said broader markets appear technically oversold, with the percentage of stocks above 200-DMA in NSE500 and the Nifty index close to record lows. Historically, that implies positive performance over the next three, six and 12 months with high hit-rates, the brokerage said.
"A key caveat is that valuations today are much higher than during previous bottoms. Another silver lining is that EM equity investors are already underweight India, with a larger underweight on India equities compared to HK/China equities, based on our survey of large EM funds," it said.
Growth concerns Earnings growth for the broader market disappointed in the recently concluded results season. Kotak Institutional Equities noted that BSE-500 companies faced growth issues, with revenue growth at 7 per cent YoY, similar to the past seven quarters. Ebitda and PAT both grew 7 per cent YoY each, with the operating performance of smallcaps lagging that of largecaps, with a 13 per cent YoY decline in PAT, resulting in FY25/26 consensus EPS cuts of 13 per cent/10 per cent for small-cap. stocks versus minor cuts for large-caps.
For BSE500, consensus is building PAT growth of 14–16 per cent each in FY26 and FY27 against 9 per cent in 9MFY25. Nuvama said this is likely to disappoint as demand dynamics are still weak, which could erode record-high profit margins.
Kotak noted that the contribution of the top-100 companies to revenues of the BSE-500 universe has increased marginally to 70 per cent, while the contribution to PAT has been broadly stable around 73 per cent. It said smallcaps continued to lag their larger peers on all growth metrices, with most sectors facing operating challenges.
Nomura said risks to its multi-quarter positive view include a scenario of a prolonged period of underperformance: if China equities become more self-sustaining, aided by a large fiscal stimulus and a significant de-escalation in US-China tensions. Also, if India’s cyclical slowdown morphs into a longer-lasting slowdown, it said.