Stock market: India-centric derating done, global pain next? Peak panic yet to come, warns Nuvama

In its latest strategy note, Nuvama Institutional Equities said the recent market correction -- worst breadth in the post-Covid era, seem to be India-centric. All this occurred amid low volatility, indicating the peak panic is yet to come, it warned.

The brokerage noted that the correction where Nifty fell for the five straight months, a first in 29 years, was seen in the backdrop of the longest bull market in terms of duration -- 55 straight months. It felt India’s earnings are reconciling with not just weak top-line growth, but also its EM peers. High valuation only added to the misery, it believes, as spurred FII outflows are undermining India’s BoP and macro liquidity.

"The correction is due to India’s weak earnings amid high valuations. However, with valuation premium to EM now at a 10-year average, India-specific de-rating is perhaps done. Moreover, the RBI’s easing could provide near-term relief. But rising global uncertainties (US growth slowdown and MAGA mania) pose fresh downside risks," it said.

Nuvama said India has directionally tracked emerging markets (EMs) for more than two decades, but has seen a big disconnect in the last two years. The strong historical correlation between India and EMs is due to global spillovers of trade, prices and flows with the first two weighing on earnings. while
flows influences valuations.

"The fresh reconciliation is mainly owing to fading earnings momentum. India’s earnings — after being decoupled from EMs most of the time post-Covid -- are now underperforming EMs. This is mainly because the outperformance to EM earnings was not due to demand, but rather margins. After all, given the large share of tradeables in BSE500 (65 per cent), India’s top line is strongly hinged to global trade – a trend that has not broken even post-Covid," it said.

Historically, Nuvama said, equities pivot only when rate cuts are deep, and valuations are cheap. "Thus, earnings yields minus bond yields is a good guide for inflection points. This is still far from turning green. Maintain defensive bias. We downgrade IT to UW and raise weights in consumer given the recent global developments," it said.

Nuvama said Nifty’s correction has pushed India’s valuation premium to EMs to 50 per cent from 70 per cent in September 2024, similar to its long-term average. It suggests that India-specific concerns are priced in, it said.

But, global uncertainties have increased due to moderating US growth and MAGA mania’s tariffs and DOGE measures. This raises US recession risks, potentially weighing on EM flows and dampening risk sentiment, it said.