Indian stock market’s consolidation deepens amid Q2 earnings downgrades

The domestic market has been on a downward trend influenced by global pessimism, profit-booking due to elevated valuation, and a shift in FII funds. This month, the global market continues to exhibit mixed signals, led by China’s disinflation, geopolitical tensions, and high inflation data. The Fed is expected to delay its 25 bps rate cut from November to December. 

Concerns are rising that the positive impact of China's stimulus package may be fading due to structural challenges. Long-term investors remain cautious about committing to the Chinese market, while short-term traders are more active. However, the investment climate will likely improve if the stimulus measures begin to take effect. The prevailing strategy is to invest in China and divest from India.

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PSU stocks, which were the standout performers over the last two years, have been among the hardest hit in the past three months. These stocks underwent considerable re-rating due to an optimistic outlook during the previous two years. Still, the rally did not align with execution expectations, which are expected to improve slowly. Consequently, a rapid recovery in PSU stocks is not anticipated in the short term.

Following the recent correction, PSU stocks are now trading slightly above the long-term average valuations. Although the reduced premium offers some valuation relief, potential volatility remains due to the gradual pace of improvements in execution, earnings, and government spending. 

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However, the long-term outlook of these stocks remains promising, fuelled by the government's long-term vision on Amrit Kaal and a surge in domestic manufacturing, especially in the infra, railways, power, and defence sectors. Given the strong growth prospects over the long term, investors might consider buying in a dip strategy.
 

Stock Market Weekly Trend

This week, the market started rangebound but easily lost the trend due to the weak Q2 result. The Nifty 50 closed at a low of 24,598 on Friday morning, 1.5% below the closing of 24,964 last week. Last week, the market failed to stay above the critical support level of 25,000, and this week, it tasted below the next support level of 24,800. 

On Friday, after the initial sell-off, the market bounced from the oversold level of 24,600, driven by selective buying in financials, auto, and metals stocks. This is because the initial set of results from private banks was positive, building an expectation that the upcoming set of financial results scheduled for the weekend will also be optimistic. 

Also Read: FPI Exodus in October: Financial Services, Oil & Gas, Auto sectors hit the hardest so far

The metals also performed well, benefiting from slightly better-than-expected growth in China’s Q3 GDP. Consecutive rate cuts announced by the ECB supported rate-sensitive stocks this week. The Nifty 50 closed at 24,854. The next key level of support is 24,600, 24,300, and then 23,900-24,000.
 

Indian stock market outlook

The concern is that India will not be able to sustain the premium valuation it has held since 2021. This is because growth is contracting, not suggesting supreme valuation. Q2 preview image: a slow pace in earnings expansion due to insipid international and domestic demand, slow government spending, and volatility in input prices. 

The rate of corporate earnings recovery in Q2 compared to Q1 is below expectation. We forecast a 4% QoQ growth in PAT for Nifty 50. The fear of a downgrade in earnings is becoming real. We continue to be cautious about the short term due to the risk of a downgrade in corporate earnings. High global inflation is impacting operating margins. There is a plausibility for India to underperform in the global market, which is also led by a shift in funds. 

However, in the long term, the outlook for the domestic market continues to be constructive, focusing on large caps and growth areas like staples, agriculture, FMCG, consumption, power, digital and infra. A "buy on dips" strategy will be advisable for the short to medium term.

The author Vinod Nair is the Head of Research at Geojit Financial Services.

Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.