Investors lose nearly ₹50 trillion in 7 weeks

Stock market investors have seen their wealth erode by close to ₹50 trillion in the past seven weeks amid a flurry of primary market issuances and foreign institutional investor (FII) selling fuelled by India Inc's tepid earnings growth and rising bond yields in the US. Though analysts are not ruling out a rebound after the brutal sell-off over seven weeks, they doubt the durability of one.

Total investor wealth fell by a whopping ₹47 trillion to ₹427 trillion on Thursday—Friday was a holiday for Prakash Gurupurab—from record market highs since 27 September when overall market capitalization was ₹474 trillion. The Nifty and Sensex hit record highs of 26,277.35 and 85,978.25 each on 27 September.

From that date Nifty was down 10.4% at 23,532.7 and Sensex by 9.76% at 77,580.31 on Thursday amid huge FII outflows and large supply of equity. A fall of more than 10% from record highs puts equity assets in correction zone. Even broader markets have corrected, with Nifty Midcap 150 shedding 10.7% from its record high of 22,515.4 on 25 September to 20,105.25 as of Thursday and the Nifty Small cap 250 by 10.1% from its life high of 18,688.30 on 24 September to 16,801.55 as of Thursday.

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After the seven weeks fall, the bellwether Nifty trades below its 200-day simple moving average of 23,555.98 as of Thursday closing of 23,532.7. While markets will continue to remain turbulent, analysts feel a bounce could be possible based on the Nifty getting support around current levels. However, a rebound, if one happens, could be sold into.

"We could get a bounce, but it wouldn't be a durable one," said Shankar Sharma, founder of wealth management firm GQuant Investech. "FIIs are expected to continue selling as quarterly earnings have been underwhelming (ex-financials) amid an economic slowdown and better opportunities elsewhere."

Indeed, China's CSI 300 index gained 8% over the past seven weeks to 4,039.62 Thursday, against Nifty's 10.4% fall, as fickle foreign money was diverted from a costlier Indian market to Chinese stocks, which rallied on policy rate cuts and a slew of financial stimulus over the same period.

Though Indian markets have corrected over seven weeks, market constituents like Jyotivardhan Jaipuria say current valuations still "leave room for a price and time correction over the next few months."

Nifty trades at 18.64 times one year forward earnings against its five -year average of 18.21 times, per Bloomberg data. The concern is that small- and mid-caps are also costly despite having corrected.

The Nifty Midcap 150 trades at 28.78 times one year forward earnings against a historic 23.66 times while the Nifty Smallcap 250 trades at 22.61 times one year forward earnings against the historic average of 16.75 times.

Motilal Oswal Financial Services has cut Nifty FY25 earnings per share (EPS) last week by another 1% post a 4% cut in the results preview for the September quarter. Overall, the financial services firm has revised the EPS downwards by 7% in the last six months, reducing the expected earnings growth in the current fiscal to just 5%, the weakest since FY20.

Of its universe of 275 companies, aggregate profit after tax for Q2 this fiscal declined by 1.3% year on year to ₹2.63 trillion, in line with expectations of flat growth. However, excluding financial services, PAT fell 9.1% y-o-y to ₹1.65 trillion against expectations of a 4.4% decline.

Against this backdrop and supply of large quantity of paper through IPOs and QIPs, FII net sold shares worth ₹1.16 trillion over the past month and a half. While DIIs, led by mutual funds, net purchased ₹1.33 trillion over the same period, large issuances or supply exceeded demand causing markets to trip.

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Ashish Gupta, CIO of Axis Mutual Fund, said that equity supply since FY24 (April 2023 to September 2024) was 1.5 times the net inflows into mutual funds but that was absorbed by FII buying of $35 billion over 18 months. However, supply through IPO and QIP and promoter and PE selling through secondary sales in the second half of the current fiscal is an estimated $55 billion or 2.5 times that of estimated MF inflows. If FIIs keep selling the way they have since October, DII inflows though necessary would be unable to absorb the supply, subjecting the markets to "vagaries of foreign flows," according to Gupta.

Aside from results and issuances, US bond yields have been rising since the Fed's rate cut on 18 September amid fears of higher inflation spurred by tax cuts by President-elect Trump and reduced borrowing costs raising the US government's fiscal deficit.

The yield on the 10-year government paper has risen by 73 basis points from 18 December to 4.44% despite the Fed cutting rates by a total of 75 basis points since then because of such fears. This, in turn, has resulted in FII outflows from emerging markets like India to the safety of the US bonds.