With the conclusion of the US elections, most of the noteworthy events for the current year 2024 are over. Though some traders may be looking forward to 23rd November (Assembly election results), 6th December (RBI’s MPC policy statement) and 18th December (FOMC policy statement), these events are not expected to make any material change in the market sentiments.
· In the absence of any foreseeable major event, the markets are in maintenance mode for the past couple of weeks.
· Benchmark indices are consolidating in a narrow range, just keeping the day traders busy.
· Broader markets are carrying out the process of clearance: the stocks that crossed the red line and strayed into bubble territory are being punished and dragged back to their right place.
· The stocks that have been underperforming (or are likely to underperform) due to macro conditions, are being assigned lower weights and stocks performing (or likely to perform) strong are being promoted to top order.
· Traders and investors who became greedy and traded beyond their financial capacity, are being taught some important lessons. They are learning how to balance the sentiments of greed and fear, manage risk and reign return expectations.
The current state of affairs of the Indian markets could be summarized as follows:
Nifty YTD2024: Decent performance, but lags alternatives
Indian stocks have delivered a decent performance YTD2024. The benchmark Nifty50 has gained over 11%; whereas Nifty500 (16.4%), Nifty Smallcap100 (21.1%) and Nifty Midcap100 (21.2%) have delivered much better returns. Media (-6%), FMCG (0.7%), Private Banks (+1.7%) are the sectors that have underperformed the benchmark indices. Pharma (33.6%), Auto (+26.5%), Realty (+25%) are some of the notable outperformers.
However, if we compare the YTD2024 returns yielded by Gilt funds (~10%) or Gold Funds (~20%), Nifty50 returns appear disappointing.
Globally, Nifty50 has been one of the best performing emerging market indices, though it lagged the major markets like the US (S&P 500 +26%), Japan (Nikkei +18%), China (+16%). Nifty50 outperformed Europe (STOXX600 7%), Indonesia (0.5%) Brazil (-3%), and South Korea (-5%), etc.
Foreign investors trim equity stakes to the lowest since GFC
Net YTD2024 FPI inflows in the Indian markets is over Rs one trillion. However, they have been net sellers in equities to the tune of Rs190.6bn.
What has bothered most of the market participants is the net selling in secondary equity markets to the tune of Rs 1.06 trn. Out of this Rs876bn worth of sale occurred in the month of October alone.
With this selling, FPIs have reduced their stake in Indian equities below 17%, from a high of over 20% in pre Covid period. The current stake of FPIs in the Indian equities is the lowest since the global financial crisis (2008-09).
Market breadth worsening
Despite the sharp outperformance of the broader market
indices, overall market breadth has been dismal YTD2024. In particular, the
breadth has been worsening consistently since June 2024.
Volumes shrinking
The level of activity in the Indian stock markets has declined
in the recent months. The traded value and the quantity of shares traded have
declined much below average. This may imply the participation of
non-institutional investors/traders in the cash equity market has declined.
Market cap at 136% of GDP
The market capitalization of India crossed the US$5 trn mark in 2024. Presently, India market capitalization contributes ~4.25% of the global market capitalization, the highest ever level. For context, in the past two decades, on an average India’s share in the global market capitalization has been close to 2.5%. At the present level, India’s market capitalization is over 135% of the FY2025e GDP, against a 10 year average of 85%.
1HFY25 Earnings growth for Nifty50 companies has been one of the worst in several quarters. As per some brokerages, about two third of sectors are trading at a premium to their historical valuations.
Orderly weakening of USDINR, bonds stable
USDINR weakened 1.5% YDT2024 to its lowest ever level of Rs84.4/USD. The decline has been orderly and well managed. The INR resilience has been remarkable considering that the RBI has been accumulating USD and also buying Gold; CAD has started to worsen, inflation has been sticky and fiscal deficit has remained elevated.
The benchmark bond yields have also eased 6-7% YTD2024, in tandem with the global trends. The bond markets have been very stable and have not shown any sign of jitteriness during general elections, escalation in the Middle East Asia, and recent sharp rise in the US benchmark yields.
Overall, the markets appear stable with no sign of panic or turbulence. The ongoing corrective phase might last for a few more months and add to the inherent strength of the Indian markets, as the excesses of the past get erased and valuations normalize.
