Stock market likely to continue its downtrend till US elections get over

Benchmark index Nifty50 has lost 6.3% to 24180.8 so far this month, pulled down by record foreign portfolio investor (FPI) selling amid geopolitical concerns, tepid quarterly earnings growth and regulatory strictures taking effect.

FPIs have net sold cash shares worth ₹88,826.75 crore in the month through 25 October, based on NSDL and BSE provisional data. While domestic institutional investors (DIIs) have net invested ₹97,090.83 crore over the same period, the downtrend is likely to continue due to a slew of reasons, although a bounce is possible after four straight weeks of a fall.

"A confluence of factors has caused the pullback this month," said Nilesh Shah, MD, Kotak Mahindra AMC.

"Chief among them is the selling intensity of FPIs, which is prompting DII buying at lower levels in cash, collateral in the form of stock margin for derivatives trades being curbed by regulators, margin trading facility (MTF) trades being liquidated as margin calls are being made on price corrections, lofty valuations correcting on earnings disappointment in Q2FY25 and geopolitical factors such as outcome of impending US elections and US bond yields rising despite Fed rate cut probably driven by the burgeoning fiscal deficit," Shah added.

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A review of 637 companies' Q2FY25 numbers shows a year-on-year decline of 0.6% and a sequential fall of 5.13% in net profit at ₹1.96 trillion. In the year-ago quarter, net profit had surged 49% y-o-y and 3.9% sequentially to ₹1.97 trillion.

Aside from FPIs diverting funds to China from India following rate cuts and fiscal stimulus to prop up the world's second-largest economy, rising bond yields in the US , which faces a widening fiscal deficit, are leading to FPI outflows from emerging markets like India.

Despite the US Fed cutting its key policy rate by 50 basis points to a 4.75-5% range on 18 September, the yield on US 10-year paper has risen from 3.7% that day to 4.2% on 25 October amid concerns of inflation driven by printing money to fund national debt of $35.8 trillion.

"Rising yields in US are souring sentiment in EMs like India, which is also closely watching the outcome of the US presidential elections," said G. Chokkalingam, founder of research firm Equinomics.

Chokkalingam sees a further 5-10% erosion in Indian stocks' market cap until the US presidential election results are out, with a bounce interspersed after a month's pullback. He warns, though, that any escalation in the Middle East war could throw "calculations" out of gear.

India's market cap has fallen by ₹37 trillion to ₹438.09 trillion so far this month on FII selling in the cash segment.

In the index futures segment, proprietary traders along with FPIs and DIIs are net short while retail HNI are net long or bullish. FPIs were cumulatively net short index futures contracts by 129,477 contracts, proprietary traders by 62,561 contracts and DIIs short by 54,577 contracts while retail /HNI were cumulatively net long 246,615 contracts on Friday, underscoring the caution in the market with Nifty ending this week below the 20-week average of 24,702.

In addition to this, an NSE rule has excluded 1,010 stocks out of 1,730 which could be used as margins or collateral for trading cash in the cash market segment under brokers' margin trading facility and by token for derivatives. The clearing corporation of NSE has allowed time to members through October-end to change these stocks. This is one of the reasons believed to be leading to investors selling stocks which can't be used as margin.

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"Since investors cannot use such stocks as margin for their trades, some people think this might lead to selling in these," said Mohit Mehra, vice-president of primary markets and payments at Zerodha. "The change might imply some selling pressure, but since there are multiple factors involved for holding stocks, the biggest of which is conviction in the stock, one cannot easily draw a direct relationship between this."

Chandan Taparia, senior vice-president (technical and derivatives research) at Motilal Oswal, pegs the short-term range for Nifty at 23,750-24,650.