The domestic markets saw another big sell-off on Monday — their fourth 1.3 per cent-plus fall in the past 10 trading sessions — as the Omicron-induced volatility accelerated selling by foreign portfolio investors (FPIs).
The Sensex dropped 949 points, or 1.65 per cent, to end at 56,747, with all its 30 components ending with losses, while the Nifty declined 284 points to finish at 16,912, with only one out of the 50 components ending with gain. Both the indices finished the session at their lowest levels since August 27.
From its peak on October 18, the Nifty has plunged 8.5 per cent amid concerns around India’s expensive valuations vis-à-vis global peers, earnings pressure due to a spike in commodity prices, a hawkish turn by central banks due to inflation concerns, and the latest factor being the threat posed by the Omicron variant.
India was the worst-performing market globally on Monday, extending its recent run of underperformance to the world markets.
“The continued selling by FPIs has weighed on investor sentiment. People are not sure how Omicron will pan out. Institutional investors might be thinking of taking some money off the table while waiting for more clarity to emerge," said Andrew Holland, CEO, Avendus Capital Alternate Strategies.
In the past 10 trading sessions, FPIs have yanked out over Rs 34,000 crore ($4.5 billion) from domestic stocks. On Monday, they sold shares worth another Rs 3,361 crore (about $450 million). The sharp sell-off by overseas funds has caused more volatility than seen in the past one year.
While FPI selling might have accelerated in the past fortnight, the cautious commentary by global brokerages since October-end has made overseas funds take a more bearish turn. Morgan Stanley, HSBC, UBS, Nomura, and Jefferies were among brokerages to either downgrade India or voice concerns over its expensive valuations.
“Omicron has created an excuse. The fall is more to do with expensive valuations. When markets are steeply valued, you need a bit of bad news to trigger a correction,” said Jyotivardhan Jaipuria, founder, Valentis Advisors. “We are still in expensive territory. We will have a time and price correction. There will be some phase of consolidation. We have more than doubled in the last 18 months. And not even corrected 10 per cent from the top.”
Mid-October, the one-year forward price-to-earnings (P/E) for the Nifty had soared to its highest-ever level of 25 times. Following the recent correction, it has moderated somewhat to 21.4 times. However, it is still high compared to the historical average of 17 times and to other emerging market (EM) peers. The MSCI EM index trades at less than 13 times P/E.
Experts said overseas investors could be rotating out of India into markets that are posting superior earnings growth.
“Indian companies are talking about pain from commodity inflation and margin pressure. Gross margins are the lowest in at least 5-6 years. Only 40-45 per cent domestic companies are able to beat consensus expectations on operating profits. In the past six months, India has underperformed on earnings upgrades. All the EMs who are commodity-heavy have done well. In our universe of about 12 large EMs, India is probably the 9th or 10th in terms of how earnings are growing,” said Sunil Tirumalai, ED & India equity strategist, UBS Securities.