Should you invest or exit the stock market now? Sensex, Nifty record worst month since COVID market crash

The Sensex and Nifty indices have recorded their worst monthly performance since the COVID-19 market crash, with the Sensex dropping 5% in October. Contributing factors include significant foreign institutional investor (FII) outflows, a surge in IPOs and QIPs, and lackluster Q2 earnings.

FII outflows totaled nearly Rs 82,000 crore this month, further straining the market already affected by a high volume of IPOs and QIPs which drained liquidity. Additionally, the second-quarter earnings season failed to provide any substantial support.

The Sensex's 5% decline in October surpasses the previous record drop of 4.58% in June 2022. The overall market capitalization of all stocks listed on the BSE has decreased by Rs 29 lakh crore this month. During the COVID-19 crash in February and March 2020, the Sensex had plummeted by 6% and 23%, respectively.

Dr. VK Vijayakumar from Geojit Financial Services believes a market crash is unlikely due to robust domestic liquidity, though a correction is ongoing, primarily driven by continued FII selling.

Factors Contributing to the Decline

The FII outflows are at their highest for a single month, significantly exceeding the outflows seen during the COVID-19 pandemic. Analysts attribute this to the "Sell India, Buy China" strategy, driven by expectations of a Chinese market rebound. The high valuation levels of Indian equities have also exacerbated the outflows.

The muted Q2 earnings season has further aggravated the situation, with big IPOs such as Hyundai India and QIP fund-raising by promoters depleting investor resources. Geopolitical tensions and uncertainty surrounding the upcoming US election have also contributed to investor caution.

Earnings growth for FY25 is projected to decline to around 10%, down from 26% in FY24. The Nifty-50 companies' earnings per share (EPS) for Q2 are expected to grow by only 2% year-over-year.

Goldman Sachs has downgraded Indian equities to neutral from overweight, citing high valuations and an unsupportive environment limiting near-term upside. InCred Equities has also reduced its Nifty target by 3% to 25,978, anticipating that the correction will extend into the December 2024 quarter due to rich valuations.

Outlook

Despite the current downturn, analysts remain optimistic about a market rebound in FY26, driven by anticipated earnings growth. Dr. Vijayakumar suggests that once there is clarity on this earnings rebound, the market can recover.

Gautam Shah of Goldilocks Premium Research believes the market is oversold and predicts a limited further downside of 2-4%, with significant upside potential. He advises investors to seize this opportunity rather than focus on the short term.

Fund manager Gurmeet Chadha notes that the correction is largely due to non-India factors and expects a swift recovery. He emphasizes the importance of investing in sectors with near-term earnings visibility, highlighting that corporate balance sheets are deleveraged and the macroeconomic outlook remains positive.

Overall, while the market correction may be unsettling, it is viewed as a normal occurrence, with a potential for quick recovery given the strong domestic fundamentals.

Disclaimer: The opinions expressed by experts in this article are their own and do not necessarily reflect the views of the Economic Times.