Stock Market Decline: Factors Contributing to the Downturn

The major Indian stock market indices, Sensex and Nifty, experienced a significant decline, extending their losing streak to a sixth consecutive session. The fall is largely attributed to fears among investors regarding substantial foreign portfolio investor (FPI) outflows, amounting to Rs 27,142 crore within a few sessions in October. This shift in investment is influenced by the strong performance of Chinese stocks, which is redirecting global investment attention away from Indian equities.

Geopolitical tensions have also exacerbated market unease. The potential for an Israeli retaliation against Iran has heightened, contributing to a rise in Brent crude oil prices, which are nearing $80 per barrel. Such increases pose challenges for India, a net importer of oil. Additionally, recent exit polls in Haryana and Jammu & Kashmir suggest potential losses for the ruling Bharatiya Janata Party (BJP), further impacting investor sentiment.

Foreign Portfolio Investor (FPI) behavior has shifted notably. The National Day holiday in China concluded recently, with Chinese mainland indices showing significant gains of 23-26% over the last month. The reopening of Chinese markets has led to increased fears of further foreign selling in Indian markets. According to V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, foreign institutional investors have turned bearish on Indian stocks primarily due to the competitive performance of Chinese equities, highlighted by a 26% surge in the Hang Seng index.

India’s stock valuations currently reveal a mixed picture, with the Nifty trading at 21.5 times its one-year forward earnings, which is above its historical average. Meanwhile, the MSCI China gauge is trading below its five-year average, creating an attractive opportunity for investors to pivot towards undervalued Chinese stocks.

The outcomes of the state elections in Haryana and Jammu & Kashmir could potentially influence market dynamics further. In Haryana, exit polls indicate the Congress might secure a majority, while in Jammu & Kashmir, a coalition led by Congress and the National Conference is expected to do well. Such outcomes could have ramifications on market sentiment, although their effect may not be profoundly market-altering.

Corporate earnings reports for the September quarter are anticipated shortly, with moderate growth expected compared to previous periods. Kotak Institutional Equities forecasts a 5.3% Year-on-Year (YoY) increase in net profits for the BSE-30 index, while MOFSL anticipates a 2% growth in Nifty earnings, excluding commodity sectors.

Geopolitical developments, particularly in West Asia, continue to affect oil prices. The Iranian Oil Minister, Mohsen Paknejad, expressed a lack of concern regarding the regional conflict. Nevertheless, any further escalation could drive up oil prices, influencing broader market conditions.