The rising inflation and the end of easy-money global policies cause Indian stocks to spiral down from all-time highs. This pain is unlikely to end anytime soon.
The S&P BSE Sensex index has fallen more than 15% since its October high. It is approaching the 20% loss denoting a bear market. The sell-off comes due to rising costs and a record drop in the rupee. It has forced the nation’s central bank to join its global peers in raising interest rates.
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The value of the Indian stock market is already down 20% from its January high of around $3.7 trillion. The unsupportive economic backdrop combined with an unprecedented exodus of foreign investors and earnings estimates that appear poised to fall cloud the prospects of a rebound.
“We expect markets to correct further from here,” said Benaifer Malandkar, chief investment officer at Raay Global Investments Pvt. “The expectation is that by the second quarter, with most of the negative news, the outcome of Fed actions discounts.”
Foreign flight
Foreign investors have been selling Indian stocks at a record pace, pulling around $32 billion from the market since September. The retreat from foreigners is part of a wave hitting nations like South Korea and Taiwan as well.
“India is not isolated as it is part of the emerging market basket, and emerging markets are out of favor,” said Raay Global’s Malandkar. “Until the U.S. Fed rate is at its peak, we will see repayments occur in all emerging markets.”
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Rosy Estimates
The fall in Indian equities has caused the valuation contraction so far. Earnings estimates for the NSE Nifty 50 index have yet to record a significant decline like that seen in MSCI Inc.’s broader measure for Asian stocks.
In recent weeks, strategists at Sanford C. Bernstein Ltd., Bank of America Corp., and JPMorgan Chase & Co. have expressed concern about the earnings optimism that has surrounded India. Pending any rally in valuations, the estimated cuts are likely to cause stocks to fall further.
Suffering Small-Caps
Smaller stocks have been hit hardest by investors’ risk aversion. Indicators of small- and mid-cap Indian stocks have already entered bear markets. Market breadth has weakened, with only 16% of S&P BSE 500 index stocks trading above their 200-day average level, the lowest level in two years.
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