A new trend, which is especially worrying for investors is that the broader market has also suffered along with headline indices, which had shown resilience in earlier sell-offs.
The market continued to reel under heavy selling on October 25 amid escalation of geopolitical crisis in the Middle East, surging bond yields in the US, and weaker-than-expected September quarter earnings of key corporates.
On October 25, the 50-share NSE Nifty fell 159.60 points or 0.83 percent to 19,122.15. BSE flagship Sensex plunged 0.81 percent or 522.82 points to 64,049.06.
A new trend, which is especially worrying for investors is that the broader market has also suffered along with the headline indices, which had shown resilience in earlier sell-offs. Nifty Smallcap and Nifty Midcap indices were down about a percent each on Wednesday.
"The uncertainties associated with the Israel-Hamas conflict will continue to weigh on markets in the near term. Positive news like decline in the US bond yields and weakening crude can help the market to revive but it may not sustain, given the uncertainty surrounding the West Asian conflict. Investors may opt for a cautious approach to the market till some clarity emerges on the geopolitical situation,” said VK Vijayakumar, chief investment strategist at Geojit Financial Services.
In the last five sessions, investor wealth has contracted by Rs 15 lakh crore as the market cap of all BSE-listed companies, which reflects the shareholders’ wealth, has fallen to Rs 308.73 lakh crore from Rs 323.82 lakh crore.
Let's take a look at the major factors driving the markets down.
Israel-Hamas war
The conflict in the Middle East is the biggest worry for investors right now as many geopolitical experts fear more parties may get involved, affecting a larger geography and population. The fact that many of these countries are oil producers, there's a major cause for concern for the global economy.
Any widening of the conflict will likely result in a further rise in crude oil prices which is hovering at $88 a barrel. This will make raw materials for a number of industries costlier, apart from an increase in cost of living. And, all these in turn will have a severe impact on the economy which is already grappling with inflationary headwinds. The sell-off indicates that the wary investors are positioning themselves pre-empting such a scenario.
US bond yield
US bonds are considered some of the safest investments in the world. With rising yield on 10-year US bonds, which has surpassed 5 percent, analysts are expecting an outflow from emerging and riskier markets.
The reason behind that is simple. Foreign investors will likely prefer to invest in US bonds that guarantee 5 percent annual risk-free dollar returns than invest in Indian equities that are prone to geopolitical risks and currency risks, which will diminish their dollar returns.
Foreign portfolio investors (FPIs) have already taken away some Rs 10,345 crore so far this month from Indian equities after a net withdrawal of Rs 14,768 crore in September.
Equity valuations
Indian equities, along with the US, are some of the most expensive stocks in the world. This makes the domestic market susceptible to sudden corrections. The froth is more visible in the broader market, which has led to relatively heavier selling in small and midcap space.
“Since the valuations in midcap and smallcap space are higher than that of largecaps, this weakness is likely to persist. Safety is now in largecaps particularly in banking majors which are fairly valued," Vijayakumar said.
Q2 earnings
The second-quarter earnings of India Inc have been a mixed bag with some surprises and quite a few misses. The lacklustre show by some key companies have dampened the overall mood in the market. For instance, banks are dealing with contraction of margins. Most major IT companies are also dealing with slowdown.
Global markets
Sentiment on Dalal Street have also been affected by weakness in global markets. All European markets opened lower on October 25. Asian indices, however, closed mixed. Singapore and South Korea closed in the red while others saw some recovery.
Disclaimer: The views and investment tips expressed by experts are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before making any investment decisions.
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