The frontline index is down almost 12% from its 52-week high in September while the mid- and small-cap indices are teetering on the edge of a bear market—down nearly 20% from their most recent highs.
Now, 78% of market experts polled by Mint have said they don’t expect the Sensex to hit 100,000 points this year. The question is whether the decline will end up being just a painful correction or a full-blown bear hug.
Relentless selling
While the markets peaked last September amid global uncertainties, more troubles followed as foreign portfolio investors (FPIs) went on a selling spree. They have sold $21 billion worth of Indian equities over the past four months, with ongoing earnings slowdown and valuation concerns intensifying the selling pressure.
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Their return is incumbent upon the attractiveness of Indian equities, experts said. “Foreign investors find Indian markets less attractive, as a 9-10% return on Indian equities offers a dollar-equivalent return comparable to US bonds, given the US 10-year bond yield (4.5-5%), the Indian rupee’s 3-4% depreciation, and the 12.5% tax on foreign capital,” said Vikram Kasat, head of advisory at PL Capital. “For FPIs to return meaningfully, they will need to see a projected return of more than 15%.”
Despite the selling spree in the past four months, FPIs have sold only 3% of their equity assets, suggesting the magnitude of selling isn’t alarming yet.
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Bear zone?
Indian stock markets have experienced a significant downturn, with all major indices retreating substantially from their 52-week highs. The small-cap segment has been hit the hardest, with the BSE 250 SmallCap index plummeting 23%. This is followed by the MidCap index, which has declined 19.3% from its recent peak, pushing it into bear-market territory.
Large-cap stocks have not been spared either, with the index registering a 14.5% decline, while the Sensex has fallen 11.6%. The power sector has suffered the most severe losses, down 33.2%, with the oil & gas index declining 29.4%. The PSU index also experienced a significant decline of 28.6%.
Amid bearish sentiment in the small-cap and mid-cap segments, the recovery is expected to be selective. “The market is now selective. Only companies with strong earnings, balance sheets and management will thrive,” said Sandip Bansal, deputy chief investment officer, ASK Investment Managers.
Peak stragglers
Beyond the grim picture painted by the indices, the decline in individual stocks is even more concerning. A Mint analysis of 3,894 BSE-listed companies shows the majority are trading far below their 52-week highs and only a mere 2.9% are trading close to their most recent highs.
While less than 1% suffered severe losses exceeding 80%, around 64% of the stocks analysed by Mint are down by 25-50%. Another 19% recorded a dramatic decline of 50-80% from their highs, and 14% are trading 10-25% below their highest points over the past year.
But Bansal and other experts remain hopeful. “Despite over 80% of BSE-listed stocks declining due to sentiment and liquidity, India’s strong economy and growth prospects offer opportunities.” He expects quality stocks to recover as growth returns and macroeconomic confidence is restored.
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Market breadth weakens
A worrisome market breadth also signals weakening sentiment and amplifies market concerns. The advance-to-decline ratio, a key metric that compares advancing stocks to declining ones, dropped to a concerning 0.70 in February from 0.90 in January. This means for every 10 stocks advancing in February, 14 are in decline, reflecting widespread selling pressure.
A look at the past year shows a fluctuating but ultimately deteriorating trend. Optimism was evident in April 2024 (1.28) and June 2024 (1.27), but sentiment has weakened since then. In fact, the ratio has been below 1 in all of the past five months except November, showing that declining stocks have outnumbered gainers for months.
This ongoing downtrend reflects weakening market sentiment, heightening investor concerns. A continued narrowing of market breadth could signal broader weakness. However, as economic activity begins to pick up, investor sentiment could rebound, leading to a more favourable advance-decline ratio.
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Valuations remain high
Despite the significant market correction, the small-cap segment remains overvalued, while other segments trade at a discount. The BSE 250 SmallCap index is currently trading at a premium to its historical price-to-earnings (P/E) ratio, signalling overvaluation.
In contrast, the BSE LargeCap and 150 MidCap indices are trading at discounts of more than 11% to their five-year medians. Kranthi Bathini, director of equity strategy at WealthMills Securities, highlighted the valuation concerns around small-cap companies, noting that these stocks tend to be more volatile than large caps, outperforming in uptrends and underperforming in downtrends.
A recent Kotak Institutional Equities report reinforced this and emphasised that despite sharp correction in the past few months, most sectors and stocks are still trading at rich valuations, with the extent of overvaluation currently inversely correlated to market capitalisation, quality and risk. Hence, the report does not find much value in most parts of the market despite the recent correction.
