Why are Indian stock markets falling, and is it a good time to buy?

Poll jitters, rich valuations to blame for market's muted May show

Pre-election jitters and expensive valuations are reasons why the equity markets are experiencing bouts of volatility this month, analysts said, as they advocate investors to navigate through this tricky period with utmost caution.

They also urged those with an appetite for risk to buy stocks at the current levels from a long-term horizon.

The S&P BSE Sensex and the Nifty 50 have lost over 1.5 per cent each during this period. 

The cuts in the mid and smallcaps were sharper with both the indices on the BSE slipping 1.7 per cent and 2.9 per cent, respectively during this period, shows data.

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The India Vix (volatility index), a measure of expected swings in the market over the next 30 days, rose for the ninth straight day on Tuesday to end at 17, the highest since January 30, 2023.

This is the longest gaining streak for the index since the pandemic outbreak in March 2020. Interestingly, the index, also known as the fear gauge, had finished at a record closing low of 10.2 just on April 23.

Analysts attribute this fall in the Indian stock markets to Lok Sabha election 2024 outcome-related anxiety among investors amid global developments. Corporate earnings back home for the March 2024 quarter (Q4 FY24), they said, have not surprised positively either.

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According to Andrew Holland, chief executive officer of Avendus Capital Public Markets Alternate Strategies, corporate results have been fairly satisfactory, with banks surprising on the positive side. Consumer companies, too, did well.

“Barring these two sectors, there has been nothing to write home about. Though there have been no downgrades, there have not been many upgrades either. On the political front, voter turnout has not been too good, which the markets are cognizant of and worried about. The confidence that the Narendra Modi-led National Democratic Alliance (NDA) will be able to secure over 400 seats is a bit shaken,” Holland said.

This Lok Sabha 2024 election-related nervousness has seen foreign institutional investors (FIIs) sell Rs 9,194 crore worth of stocks thus far in May, dwarfing buys of domestic institutional investors to the tune of Rs 5,129 crore during this period, data said.

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Valuation worry
 

Another worry is the expensive valuations of the Indian markets (Nifty 50 12-month rolling forward PE at 21x), relative to history and bond yields, analysts said.

While the Nifty 50 valuations are more palatable, analysts at Kotak Institutional Equities believe the broader market valuations are even more expensive (Nifty Midcap 100 Index one-year forward PE at around 40x), with the expensiveness being inversely proportional to the capitalisation, quality, and risk.

“Some are unhinged from fundamentals and reality, and entirely based on optimistic assumptions, wrong valuation methodologies, and unrealistic narratives. In our view, assessing businesses on a bottom-up basis, in light of their business models, gives a better picture of the relative exuberance currently exhibited by narrative-based stocks,” wrote Sanjeev Prasad, co-head, Kotak Institutional Equities, in a recent note co-authored with Anindya Bhowmik and Sunita Baldawa.

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For long-term investors, V K Vijayakumar, chief investment strategist at Geojit Financial Services believes the ongoing volatility and uncertainty presents buying opportunities. Once clarity emerges on the Lok Sabha election outcome, the markets, he said, will bounce back sharply led by high-quality largecaps, which are weak due to big selling by FIIs.

Given the developments, analysts at Axis Securities said style and sector rotation will play a critical role in the alpha generation. The broader market, they feel, may see some time correction in certain pockets in the near term and flows will likely shift to largecaps and maintain their December 2024 Nifty target at 23,000 – up a modest 3.3 per cent from the current levels.

Holland suggests investors remain cautious at the current juncture and those who have the appetite for risk and volatility to buy stocks at the current levels from a long-term horizon.

“Investors need to be stock specific and should not rush to buy (stocks) at the current levels. The next big event for the markets post the Lok Sabha 2024 election outcome is the budget, which could also see some nervousness creep in. It is just a matter of a few weeks for the poll outcome. Remaining on the sidelines will not be a bad idea to avoid disappointments later,” he added.

Nifty ends flat for 12th time in history

The benchmark Nifty ended flat on Wednesday at 22,302.5 — the same as its previous day’s close. This was only the 12th time the index had closed at the same level for two straight trading days. The last time this happened was on March 31, 2017, when Nifty closed at 9,173.75. Meanwhile, Sensex closed almost flat on Wednesday after a volatile trade, down 45 points. Tracking weak Asian markets and continuous foreign fund outflows, it declined for the second straight session to close at 73,466.39.

Sameer Mulgaonkar