Domestic stock markets came under intense selling pressure Thursday amid global concerns that recovery from the Covid pandemic will slow down as elevated inflation is likely to force central banks to tighten monetary policy. While the benchmark Sensex of the BSE fell 1.9 per cent or 1,159 points to close at 59,984.70, the broader NSE Nifty Index fell 1.94 per cent or 354 points to close at 17,857.25.
This was the biggest Sensex fall in a day since April 30, 2021. Market participants say the fall may get deeper over the next couple of weeks. Even the recent investment pattern of foreign portfolio investors suggests that they have been reducing their holdings. Over the last six trading sessions, FPIs have sold domestic equities worth Rs 12,866 crore. Provisional data released by stock exchanges show FPIs sold domestic equities worth a net Rs 3,818 crore Thursday.
If high valuations have been a growing concern among investors, market participants fear that recovery from the Covid pandemic will be slow if rising inflation in many countries force central banks to raise interest rates.
Deepak Jasani, Head of retail research, HDFC Securities, said: “Investors will look to the European Central Bank later Thursday for reassurance that surging prices are just transitory, and not about to spiral out of control. In addition to the ECB policy meeting, investors are awaiting a report later Thursday on US economic growth, which is likely to show a cooling recovery, as well as weekly jobs data.”
FPIs too have been reducing their holdings. But fund managers say investors have no cause for panic as the fundamentals remain strong and the markets will bounce back.
Analysts say valuations were already stretched as an easy liquidity position had pushed stock markets to new peaks. The markets have traded very strong this calendar year despite the second Covid wave and concerns over its impact on the economy. High liquidity in global markets, better earnings growth and hopes of stronger growth in the Indian economy took the markets to new highs. Since January 1, 2021, the Sensex has risen over 25 per cent and since August 1, it is up over 14 per cent.
If the continued rise in the markets across market capitalisation has now led to a situation where stocks have turned expensive on the valuation front, leading to some discomfort among investors and market participants, Thursday’s fall could likely unnerve sentiments of a large number of investors who entered the markets over the last six months to a year.
In a report released October 23, Nomura Global Market Research announced to downgrade India equities from overweight to neutral in regional allocation. “We now see an unfavourable risk-reward given valuations, as a number of positives appear to be priced in, whilst headwinds are emerging,” said the report prepared by its equity strategists Chetan Seth and Amit Phillips.
“This fall in the index has derailed the recent recovery and we may see a further slide in the following sessions,” Ajit Mishra, Vice President-Research, Religare Broking Ltd, said.
While the markets have fallen 3.6 per cent since the high of 62,245 it hit last week, market participants say the correction could go up to 10 per cent in the large cap index and up to 15-20 per cent in the mid and small cap indices. If FPIs continue to reduce their holdings in Indian equities, the fall will only get deeper for now.
There are also concerns over how the FPIs may react following the tapering of the bond purchase programme by the Federal Reserve, beginning next month. While global liquidity has been one of the primary drivers of markets to these levels, a withdrawal of liquidity may lead to some outflow and thereby correction in the markets.
Vinod Nair, Head of Research at Geojit Financial Services, said, “Bears continued to dominate domestic indices, tracking cues from weak Asian and European markets ahead of a policy update from the European Central Bank. Globally, investors are on the edge, awaiting the US GDP data releasing later in the day along with the outcome of the Fed meeting scheduled for next week. Domestic markets witnessed broad-based selling dragged by banking, metal and realty stocks.”
The main worry of retail investors is whether they should exit from the market now. Long-term investors, an analyst said, should continue to hold their investments as market participants feel that the long-term fundamentals remain strong and the equities will do well over the 3-5 year investment horizon.
Even Nomura, while downgrading Indian equities to neutral, said it “will look for better entry points given our still-constructive medium-term view.”
The CEO of a leading mutual fund said investors should not panic and sell. “They must stick to their investments as markets will bounce back after some correction,” he said, adding that even domestic traders and market participants book some profit ahead of Diwali, contributing to the decline and later adding stocks when the market declines.
While new investors who are underweight equities should continue with their investments, experts say investors who are overweight equities now (following the sharp rise in equities over the last one year) should move some of their investments to hybrid funds to rebalance their portfolio. They may also look to reduce their exposure in mid and small caps and move to large cap funds or companies.