Nifty 50 down 8% from record high: What’s behind the drop? Should investors buy or hold back? Experts share insights

October 2024 has brought back memories of the market chaos triggered by the coronavirus pandemic. The Indian stock market benchmark, Nifty 50, has seen the sharpest drop since the crash of March 2020. The Nifty 50 index has slipped 6.32 per cent in October so far. It has lost 8 per cent from its all-time high of 26,277.35, recorded on September 27, over just 19 trading sessions.

This recent sell-off has resulted in 35 constituents of the index to trade between 10% and 39% below their recent one-year peaks as per the Trendlyne data.

The reasons behind the crash are clear. A combination of heavy selling by foreign portfolio investors (FPIs) due to stretched market valuations, disappointing Q2 earnings from India Inc., geopolitical tensions, and fading expectations of aggressive rate cuts by the US Fed have collectively weighed on the market.

In a record-breaking move, FPIs have withdrawn over ₹1 lakh crore from the Indian financial market in October alone— a scale of outflow not witnessed even during the COVID-19 crash or the global financial crisis of 2007-2008.

"Indian markets have fallen on all days of the week, reeling under FPI selling pressure, weak Q2 results from most corporates and rising treasury yields in the US. Though a bounce in the markets is overdue, it needs a reversal of selling pressure from FPIs and some sentiment stability in the local investor community," Deepak Jasani, the head of retail research at HDFC Securities, observed.

Mint reached out to experts to understand the factors driving this market downturn and gather their advice for investors during this volatile period. Here’s what they had to say:

Sneha Poddar, VP - Research, Wealth Management, Motilal Oswal Financial Services

This is a healthy correction after a very long period. FIIs have sold almost nearly ₹1 lakh crore in October so far and are shifting towards China post-stimulus announcement and premium domestic market valuation.

Q2FY25 earnings, too, are not very encouraging, with growth moderating across major counters.

At this juncture, the focus will remain on earnings growth and valuation.

State elections, along with the US election in November too, are likely to create volatility going ahead.

“Investors should adopt a stock-specific approach rather than look at the indexes and look for sectors and stocks with good results and comfortable valuations,” said Poddar.

“This correction should be seen as an opportunity to build a quality, long-term portfolio in a staggered manner, as the long-term outlook remains bright,” Poddar said.

Gaurav Arora, Fund Manager at Equirus

How one should approach investment into equities at the current juncture is more of a behavioural issue.

“An investor needs to be aware of their investment time horizon. If they have a time horizon of three or more years and are not bothered by intermittent fluctuations in equity markets, it's an opportune time to invest a good part of the investable surplus into equities, preferably through mutual funds or PMSs,” said Arora.

While the broader indices have corrected by single-digit percentages, some segments of the market have seen a much larger fall, thus resulting in good selective opportunities which a good fund manager can exploit.

“If one is perturbed by market volatility, then investing systematically would be more prudent. One must, however, stick to quality stocks and avoid those stocks with an uncertainty of earnings and valuations that are extremely rich; corporate governance is questionable. India's growth story is still great from a long-term point of view, and recent weakness offers a good opportunity to buy into it,” Arora said.

Sandeep Raina, Executive Vice President-Research, Nuvama Professional Clients Group

It was expected due to earnings deceleration (1HFY25 +4%, against FY20-24 CAGR of +20%) and attractive valuation in China compared to India, specifically for FPI.

“In the current context, we recommend buying a certain sector that has not performed since the last two to three years and where the chances of earning growth are much better than in broader markets like IT services, Hospitals, Jewellery ancillary, and proxy to telecom positive cash flow,” said Raina.

Vinod Nair, Head of Research, Geojit Financial Services

The sustained selling by FIIs and lack of triggers in the domestic market may impact the near-term sentiment in the market.

The September quarter's results were impacted by a tepid demand environment and margin pressure, which dragged FMCG, metal, auto, and realty the most.

While IT remained relatively flat and contributed less to the overall losses in expectation of a pickup in BFSI spending and a favourable outlook in US spending.

“We expect the consolidation to continue in the short term; a reversal in trend will depend on a slowdown in FIIs selling intensity and the outcome of the US presidential election,” said Nair.

The domestic macros are largely favouring the market, with the unveiling of strong PMI data and the RBI reiterating its economic growth forecast for FY25.

"A moderation in valuation, a pickup in earnings in H2FY25, and an expectation of an RBI rate cut in 2025 will provide support to the market. Sectors to watch include consumption, FMCG, infrastructure, new-generation companies, manufacturing, and chemicals," Nair said.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.