The Indian stock market experienced a sharp downturn on Monday, September 30, as the Sensex and Nifty 50 indices crashed by more than 1% each, triggered by a combination of weak global cues and profit-booking by investors at elevated levels. The selloff was not limited to largecap stocks, as both midcap and smallcap segments witnessed declines, resulting in an overall loss in market capitalization for BSE-listed firms.

The Sensex opened at 85,208.76, slightly below its previous close of 85,571.85, and quickly plunged over 1% to reach a low of 84,530.32. Meanwhile, the Nifty 50 also struggled, falling below the psychologically significant 26,000 mark. The index opened at 26,061.30, compared to its previous close of 26,178.95, and slipped further to 25,882.30, recording a fall of over 1%.

By around 12:50 pm, the Sensex had dropped by 972 points (1.14%), trading at 84,599, while the Nifty was down by 282 points (1.08%), standing at 25,896. The bearish trend was evident across the market, as mid-cap and smallcap stocks also fell, pushing the market capitalization of BSE-listed companies below Rs 475 lakh crore from nearly Rs 478 lakh crore in the previous session.

Factors Behind the Market Decline

The recent selloff in the Indian stock market has been attributed to a mix of both domestic and international factors. Here’s a breakdown of the key reasons behind the downturn.

Middle East Tensions

Heightened Geopolitical Risk: Tensions in the Middle East have intensified, with increased attacks between Israel and Iranian-backed forces. Israel’s recent killing of Hezbollah leader Sayyed Hassan Nasrallah in Beirut, as well as retaliatory strikes against Hezbollah militia in Lebanon and Houthi militia in Yemen, have raised concerns about a potentially larger conflict involving Iran, Israel, and the United States.

Flight to Safe-Haven Assets: Although geopolitical tensions in the Middle East are not new, the fresh escalation has made investors more cautious, driving them away from riskier equity investments and towards safe-haven assets like gold.

Overvaluation Concerns

Profit-Booking at Elevated Levels: Despite the Indian market’s strong medium to long-term outlook, concerns over high valuations have prompted investors to book profits at record levels. The current price-to-earnings (PE) ratio of Nifty 50 stands at 25.8, which is higher than its one-year forward PE of 21.6, raising concerns about overvaluation.

Rally Pauses After Recent Gains: Before this correction, the Nifty and Sensex had witnessed a strong rally, gaining over 3% in a six-session streak fueled by expectations of foreign inflows following a US interest rate cut. However, in the absence of any new catalysts, investors have chosen to cash in on recent gains.

China Measures

China’s Stimulus Measures: Recent stimulus measures announced by China have raised concerns about potential outflows from Indian equities, as foreign investors may be attracted to the cheaper valuations in the Chinese market.

Foreign Portfolio Investors (FPIs) Sell-Off: FPIs sold Indian equities worth Rs 1,209.10 crore on Friday, September 27, which has contributed to the recent decline. Despite this, experts believe that India’s strong economic growth will continue to attract foreign investors in the long run.

Q2 Earnings Season

Corporate Earnings: With the Q2 FY25 earnings season approaching, investors are exercising caution and booking profits at record highs. HCL Tech is set to kick off the earnings season with its Q2 results on October 14, and robust corporate earnings will be crucial in supporting the market’s stretched valuations and driving it to new highs.

Mixed Cues from Global Markets

China’s Manufacturing Sector: Mainland China stocks surged by 4% after reporting a Purchasing Managers’ Index (PMI) of 49.8 for September, slightly beating expectations of 49.5. However, this still marked the fifth consecutive month of contraction for China’s manufacturing sector.

Japan’s Political Change: In contrast, Japan’s Nikkei 225 index plunged over 5% following Shigeru Ishiba’s victory in the Liberal Democratic Party elections, setting the stage for him to become Japan’s next prime minister. The uncertainty regarding the new leadership contributed to the selloff in Japanese equities.

US Market Movements: While the Dow Jones Industrial Average reached a record high on September 27, driven by hopes of further Federal Reserve interest rate cuts due to a subdued inflation report, the Nasdaq and S&P 500 displayed mixed performances, with the Nasdaq dipping slightly and the S&P 500 edging lower but staying close to record levels.

Key US Data & Powell’s Speech

Fed Chair Powell’s Upcoming Speech: Investors are also on edge ahead of several crucial events this week, starting with Federal Reserve Chair Jerome Powell’s speech scheduled for later today.

Upcoming Economic Data Releases: Key data releases such as job openings, private hiring figures, and the ISM manufacturing data are expected this week. Additionally, the US nonfarm payroll report and the unemployment rate report, due at the end of the week, could significantly impact expectations around future rate decisions.

Market analysts suggest that while the recent correction is driven by profit booking and global uncertainties, it could offer an opportunity for long-term investors to accumulate quality stocks at reasonable valuations. The upcoming Q2 earnings season will be a crucial factor in determining the market’s direction, as healthy corporate earnings could help the market recover and push it to fresh highs.

In the short term, however, investors should brace themselves for potential volatility, driven by global geopolitical tensions, movements in the US Federal Reserve’s monetary policy, and any significant changes in the domestic earnings outlook.

Story first published: Monday, September 30, 2024, 13:08 [IST]