October 2024 was a significant downturn for the Indian markets, with the Sharp fall in Nifty 50, 5.40% to mark the biggest monthly drop since the Covid-19 pandemic market crash in March 2020. This sharp decline has raised concerns among investors and analysts, reflecting a dramatic reversal from the bullish sentiment that dominated 2024. Sharp fall in Nifty 50 coupled with ongoing macroeconomic and geopolitical uncertainties has forced investors to re-evaluate their strategies in one of the world’s most dynamic markets.
From record highs to dramatic falls
For the first nine months of 2024, Indian markets were on a bull run, with the Nifty 50 and other indices hitting new record levels. The all-time high of 26,777 in late September 2024 underlines the market’s rapid growth, driven by strong investor confidence and a steady economic recovery post the pandemic.
However, the story took a new turn in October, when the Sharp fall in Nifty 50 wiped out months of gains. The 7% correction from its all-time high reflects the growing bearish sentiment in the markets. The index’s biggest monthly decline since March 2020 occurred over 16 trading sessions, with the index closing in the green on only four occasions. Four sessions recorded a decline of more than 0.5%, and the worst day was a 2.2% drop on October 3.
Key factors driving Sharp fall in Nifty 50
Several factors have contributed to the Sharp fall in Nifty 50 in October, ranging from earnings disappointment to high valuations, all of which have led to the market’s worst monthly performance in years.
Weak earnings reports
A key reason behind the recent market correction has been disappointing earnings results for the September quarter. Results for most companies that have reported so far have been below market expectations, raising concerns that the lofty valuations of Indian stocks are no longer justified.
Companies have struggled to deliver strong earnings growth, which is key to maintaining high share prices. When earnings fail to meet expectations, investor sentiment quickly sours, especially when stocks are trading at expensive multiples. In this case, the underperformance in earnings has exacerbated the market correction, raising concerns about the broader economy.
Expensive valuations
Indian equities had risen without a correction in 2024, pushing valuations to expensive levels compared to global peers. For most of the year, Indian stocks were trading at premium multiples supported by strong investor sentiment and high growth expectations.
However, it is becoming increasingly difficult to justify these high valuations, especially when corporate earnings do not match the optimism reflected in share prices. Even after the massive drop in the Nifty50, many stocks are considered expensive relative to historical levels, which suggests that unless earnings growth improves significantly, the market could fall further.
Foreign portfolio investor (FPI) outflows
FPIs, who have been a key source of capital for Indian markets, are pulling out funds at a record pace. October saw the biggest monthly outflow on record, with FPIs selling ₹92,143 crore worth of Indian equities. This is far more than the previous record set during the pandemic in March 2020, when ₹65,816 crore was pulled out.
A major reason for these outflows has been a shift in global capital allocation. Many FPIs are redirecting their investments to markets such as China, where valuations are more attractive following the country’s economic stimulus measures. In contrast, Indian stocks are considered expensive, leading to massive reallocation of funds from Indian equities.
Weakening consumer demand
Another reason for the Sharp fall in Nifty 50 is signs of waning consumer demand in key sectors such as automotive and fast-moving consumer goods (FMCG). Rising inflation, particularly due to rising commodity prices, is putting pressure on household spending, thereby reducing sales of consumer-oriented companies.
Sharp fall in Nifty 50 in urban consumer spending has been particularly evident, reflecting macroeconomic challenges including rising cost of living. These trends are likely to weigh on corporate earnings in the coming quarters, further fuelling market concerns about growth prospects.
Geopolitical and economic uncertainty
Rising geopolitical tensions, especially in the Middle East, have added to market volatility. The conflict has contributed to a rise in crude oil prices, which has a direct impact on India, one of the world’s largest oil importers. Higher oil prices signal higher inflation, which in turn affects everything from consumer spending to corporate profitability.
On the economic front, the US Federal Reserve’s reluctance to signal a major interest rate cut has also weighed on market sentiment. Rate cut expectations at the start of the year had boosted market optimism, but with those expectations fading, global liquidity conditions could tighten even further, putting additional pressure on emerging markets like India.
Change in market sentiment: From buying in dips to selling in ups
For most of 2024, investors were eager to buy in market dips, confident that the bullish momentum would continue. However, this dynamic has changed sharply in recent weeks. Investors are now selling in ups rather than buying in dips, a notable shift in behaviour. Whenever the market has attempted a comeback, investors have seized the opportunity to sell positions, pushing prices further down.
This shift in sentiment underscores growing caution among market participants. As valuations remain stretched and earnings disappoint, the confidence that fueled the earlier rally has been replaced by uncertainty and doubts about the market’s near-term direction.
Can domestic institutional investors mitigate the decline?
Domestic institutional investors (DIIs), including mutual funds, insurance companies and pension funds, have played a key role in mitigating the Sharp fall in Nifty 50 by coming forward to buy stocks, as FPIs sold their holdings. While this has prevented a more severe correction, there are concerns that DIIs may not be able to fully offset the impact of continued FPI selling, especially if earnings and economic data remain disappointing.
Sectoral impact: Auto, FMCG and IT sectors face challenges
The market decline has hit sectors such as auto, FMCG and IT particularly hard. Auto sector sales have declined due to weak consumer demand and rising input costs. Meanwhile, FMCG companies are facing challenges due to slowing demand and inflationary pressures, especially in urban areas.
The IT sector, which has historically been a strong performer, is also facing difficulties due to a slowdown in global demand for digital services. The weak performance of these key sectors has weighed heavily on the overall market sentiment, leading to a Sharp fall in Nifty 50.
Looking ahead: What can reverse the decline?
While the near-term outlook for the market remains cautious, several factors could potentially reverse the current decline:
Better earnings performance: If companies can deliver stronger-than-expected earnings in the upcoming quarters, it could help justify current valuations and restore investor confidence.
Positive economic data
Improvement in key economic indicators such as GDP growth, consumer spending or industrial production could boost market sentiment and allay concerns about valuations.
Stability in global conditions
Resolution of geopolitical tensions, especially in the Middle East, or more clarity from the US Federal Reserve on interest rates could provide relief to the market.
Fall in oil prices
Stability or decline in oil prices would ease inflationary pressures, especially for sectors such as auto and manufacturing, which are heavily impacted by rising input costs.
Conclusion
Sharp fall in Nifty 50 in October has accelerated the bullish momentum that characterised the first three quarters of 2024. High valuations, weak earnings and record foreign outflows have created a challenging environment for investors. As market sentiment moves from optimism to caution, the road ahead is likely to be volatile. Investors will need to closely track earnings reports, economic data and global developments to navigate this period of uncertainty in the Indian markets.
ZERODHA 1) : https://zerodha.com/open-account?c=EJ4366
Angelone 2) : https://tinyurl.com/2gloc3g6 or
Upstox3): https://link.upstox.com/9w4tNo1rK8au7VK47
