Markets tank over 10% from record highs amid FII exodus, weak Q2 earnings, elevated valuations

New Delhi: Benchmark indices Sensex and Nifty after smashing many record peaks this year, slipped into a correction mode, with the NSE key gauge falling over 10 per cent from its record high hit in September amid concerns of foreign investors fleeing the domestic market, weak Q2 earnings and stretched valuations.

The BSE benchmark Sensex hit its record peak of 85,978.25 on September 27 this year, and the NSE Nifty also reached a lifetime high of 26,277.35 on the same day.

However, markets came under bear attack from October onwards. The BSE benchmark gauge is down a massive 8,397.94 points or 9.76 per cent from its all-time high, and the Nifty has also lost 2,744.65 points or 10.44 per cent from the record.

"Elevated valuations had already raised concerns, but a stimulus package in China prompted a significant shift in Foreign Institutional Investor (FII) flows from India to China. This exodus was further fuelled by weak Q2 earnings, while a rise in US bond yields and the dollar index added pressure, extending the FII sell-off. Consequently, the Indian market has seen record FII outflows over the past one and a half months," Santosh Meena, Head of Research, Swastika Investmart Ltd, said.

Foreign investors pulled out a massive Rs 94,000 crore from the Indian stock market in October, making it the worst-ever month in terms of outflows, triggered by the elevated valuation of domestic equities and attractive valuations of Chinese stocks.

The outflow came after a nine-month high investment of Rs 57,724 crore in September this year.

The biggest disappointments this quarter came from FMCG stocks, where expectations of strong earnings driven by rural recovery and a favourable monsoon were unmet, Meena said.

"Instead, the sector faced one of its worst quarters, especially in terms of urban consumption. Another significant setback was seen in microfinance companies, which reported sharp declines in profitability and asset quality, reflecting heightened challenges in this segment," he added.

In October alone, the BSE benchmark slumped 4,910.72 points or 5.82 per cent, and the Nifty tumbled 1,605.5 points or 6.22 per cent.

Benchmark indices are trading lower so far this month also.

Sensex made monthly gains in seven months this year. On a monthly basis, it gave negative returns in January and May.

Despite the recent correction, the Sensex is up 5,340.05 points or 7.39 per cent so far this year.

"Several factors have contributed to this correction, with sustained outflows from FIIs playing a central role.

"Other contributing factors include weak second-quarter earnings leading to a valuation correction, a significant depreciation of the Indian rupee against the US dollar, a disappointing inflation reading for India, China's economic stimulus, and a rise in US 10-year bond yields -- all of which have collectively pressured Indian equities," Vishnu Kant Upadhyay, AVP of Research and Advisory at Master Capital Services Ltd, told PTI.

"For the September 2024 quarter, several sectors reported disappointing earnings. Out of these, the automobile sector struggled the most, reflecting a significant decline in demand for vehicles.

"The FMCG sector also faced significant hurdles with several companies reporting muted sales growth," Upadhyay noted.

While the Indian market has a strong growth potential, high valuation is a concern that could lead to further downward pressure on Indian stock prices if not backed by earnings growth, he added.

According to Meena of Swastika Investmart Ltd, historically, markets have rallied by year-end, and this seasonal trend might support positive momentum again this year.

On the outlook for the market going ahead, Meena said key factors to watch include FII flows, which will play a critical role, while the Maharashtra election will serve as a major domestic event.

"Globally, updates from China, US macroeconomic data, the dollar index, US bond yields, and the December FOMC (Federal Open Market Committee) meeting will be essential to monitor as they may impact market direction," he added.

VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said during a correction phase in the market, like the present one, there will always be counter moves to facilitate a bounce back.

"Domestically, the worry is the disappointing Q2 results and the consensus earnings downgrade," he said.