Bear bites: Nifty & Sensex hit a low. How deep is the dip?

Indian equities have been on a rollercoaster ride over the past month, with sharp bouts of selling swiftly followed by bargain hunting as investors pounce on dips. During this volatile phase, the benchmark indices—Nifty 50 and S&P BSE Sensex—have dropped by 5% and 4%. On Tuesday, the Nifty 50 plunged to its lowest point in over four months, and the Sensex marked a three-month low.

On a closing basis, the Nifty 50 hit a low of 23,868.80 points on 26 June and the Sensex on 6 August at 78,593.07 points.

On Tuesday, the former settled 1.1% lower at 23,883.45 points while the Sensex ended 1% down at 78,675.18 points. Financial services, automobiles, and fast-moving consumer goods were the day's biggest market laggards.

Now the million-dollar question is: How much longer will this sell-off drag on before the market finds its footing?

Temporary setback?

Feroze Azeez, deputy CEO of Anand Rathi Wealth, suggests that the current market corrections are just a temporary setback, and “we may experience a further decline of around 4-5%”. He believes, “We are at the fag end of the selling rather than the beginning”.

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That said, domestic sentiment remains robust, as reflected in the continued inflows into small-cap funds, he noted. While sectors such as defence and financials have already seen significant corrections, he anticipates a further decline in capital goods and technology stocks.

A sharp contrast emerged between domestic and foreign investor sentiment. DIIs exhibited strong confidence, net buying ₹16,040.81 crore worth of Indian equities as of 11 November, while FIIs remained wary, net selling ₹19,567.96 crore.

While DIIs net bought ₹1,854 crore on Tuesday, FIIs offloaded ₹3,024 crore worth of Indian shares.

Many reasons for the dip

"One can ascribe multiple reasons for the swing in foreign flows— earnings disappointment, US 10-year yields are up approximately 80 bps (basis points) since mid-September, dollar index has strengthened by 4.2% and policy changes have led to shift in flows to Chinese and Japanese markets,” said Ashish Gupta, chief investment officer of Axis Mutual Fund, in a note.

“The current outflow of foreign institutional investment in India is merely a tactical retreat; the long-term outlook remains highly compelling,” Stefan Hofer, managing director and chief investment strategist at LGT Bank Asia, said. He told Mint that the only point of concern for India at present is its valuations, advising his investors to hold off and enter the market when the timing and valuation aligns better.

The Nifty 50 is trading at a price to earnings multiple of 23.20 times, slightly higher than its 10-year average of 22.93 times, showed Bloomberg data.

'Moderate but robust returns'

“We believe the Indian market has compounded well over time in both INR (rupee) and USD (dollar) terms, ranking among the best performing stock markets worldwide over time,” highlighted a Morgan Stanley note on 11 November. “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,” it added.

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“We are still mid-cycle in earnings and that the domestic bid has more to go and may now be supplemented by additional foreign buying,” the note read. Morgan Stanley is of the view that global flows are likely to rise moving forward. “Rising index weights now make India's equity market hard for investors to avoid. Given our growth view, it is possible that India will continue to gain share in global indices going forward, directing both active and passive money into Indian equities.”

India has proven to be a fruitful market for private equity, venture capital funds and sovereign funds over the past several years who have managed profitable exits in recent years and "we expect this cohort will also step up activity in the coming decade,” the foreign brokerage added.