After the latest decline, the benchmark National Stock Exchange Nifty is down 1,365 points, or 6.8 percent, from its peak of 20,222.5 on September 15, 2023. Experts do not rule out a further correction amid a host of headwinds, as increasing US. bond yields and crude oil prices, geopolitical uncertainties, and earnings disappointments. Additionally, India’s general elections could emerge as another uncertainty if state election results are not favorable, experts added.
The yield on the 10-year U.S. benchmark bond rose above 5 percent for the first time since 2007 on Monday, weighing on equity market sentiment worldwide. Although the yield has retreated slightly below 5 percent, it remains at a multi-year high, which will continue to put pressure on capital flows.
“In addition to rising bond yields, as markets are wary of a further escalation of the war in Israel, sentiments about risk are now clearly evident. Domestic macroeconomics continue to remain resilient… However, the risk of deficient rainfall and reservoirs still remains in nascent farm income and rural recovery,” JM Financial said in a report.
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The higher US yields pose risks for equity markets on two fronts – the outflow of foreign capital to US bonds due to better risk-adjusted returns and an economic slowdown due to higher borrowing costs.
Analysts say the negative sentiment may continue to drag down the market, even as price-to-earnings (P/E) valuations return to their long-term averages.
“On valuation, Nifty is in a comfort zone around 18-19x the one-year forward P/E. However, the negative sentiment due to global factors may continue to weigh on the market. The mid-cap and small-cap segments may see a bigger correction, due to their higher valuations,” said Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services.
Earnings disappointments at a host of marquee firms, particularly in information technology and fast-moving consumer goods, make it difficult to justify high valuations, experts say.
According to some fund managers, the market continues to trade at an elevated level, but a significant correction from current levels may provide a good entry opportunity for long-term investors.
Some suggest that investors use their available funds in case of another 4-5 percent drop from current levels in the reference rates. This can imply a 15-20 percent correction in medium and small capsules.
“The current stock market is trading at somewhat high levels considering the valuations, and investors who require near-term cash flows should move away from stocks. Investors with a further five-year view can continue to stay invested,” said Rajeev Thakkar, chief investment officer at PPFAS Mutual Fund.
“The current fall could be used to increase the weight of equities gradually if an investor is already underweight. In the case that they are overweight stocks, they should do a review of their portfolio and raise some money by taking profits from their positions. This can be deployed later when the markets appear to be a short- or medium-term bottom,” said Deepak Jasani, head of retail research at HDFC Securities.
Some experts point out that the impact of geopolitical issues on the equity market is generally limited to a short term.
“If the conflict escalates and if energy prices remain high, it could keep inflation levels elevated, leading to higher interest rates, which can potentially depress stock market valuations worldwide. However, it is important to note that historically, the impact of geopolitical tensions has always been transient without affecting long-term performance,” said Anand Shah, head of portfolio management services and alternative mutual fund investments at ICICI Prudential Asset Management Company. .
Experts also point to the possibilities of positive developments that can drive the market upwards.
“Any positive development on the geopolitical side or a decline in US bond yields and oil prices will act as a positive trigger for the market,” Khemka said.
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