October Sell-Off: Nifty 50 tumbles over 6% to log worst monthly show since March 2020

In October, the Indian markets took a sharp U-turn for the worse as a fresh wave of challenges weighed heavily on investor sentiment, keeping risk assets out of favour. Concerns regarding slowing earnings growth for the September quarter, elevated valuations, persistent selling pressure from FPIs, escalating geopolitical tensions in the Middle East, and increasing uncertainty surrounding the upcoming U.S. presidential election collectively exerted pressure on equities.  

Additionally, fading hopes for a substantial rate cut by the U.S. Federal Reserve have further unsettled the markets. 

While the majority of Asian markets, including Japan, China, and Hong Kong, ended October in positive territory, and the U.S. markets are poised to conclude the month with healthy gains, the Indian markets experienced significant declines.

One notable trend observed in October was that companies reporting earnings that met or exceeded expectations saw their stock prices skyrocket, while those that fell below estimates experienced significant sell-offs.

Worst monthly performance since March 2020

The Nifty 50 concluded October with a notable drop of 6.22% to 24,205, marking its largest monthly decline since March 2020, when it plummeted 23.25% amid the COVID-19 pandemic. This sell-off has led the index to correct 8% from its peak of 26,277, reached in late September.

The October downturn has caused 34 constituents of the index to decline between 10% and 38% from their recent one-year highs, according to Trendlyne data.

Out of the 22 trading sessions in October, the Nifty 50 closed in the green on five occasions. Notably, the index posted losses exceeding 0.5% nine times, with the worst session occurring on October 3, when it tumbled by 2.2%. The last time the index gained more than 1% in a single session was on September 20.

On the broader market front, both Nifty Midcap 100 and Nifty Smallcap 100 tumbled 6.72% and 3%, respectively, in October. Among the sectors, the FMCG index witnessed the worst performance, plummeting by 10%, marking its largest monthly decline in the past six years. 

Additionally, the Nifty Realty index also suffered a significant setback, tumbling by 9.3%, which represents its worst monthly drop since March 2020.

Q2 earnings disappointment

The disappointing earnings reported by Indian corporations for the September quarter so far served as a significant catalyst behind the market's worst performance. After a relentless rise in Indian stocks during the first three quarters of the calendar year, valuations had climbed to levels that are comparatively high on a global scale.

To validate these elevated multiples, companies must deliver robust earnings. Unfortunately, the majority of firms that have disclosed their results for the September quarter have fallen short of Street estimates. This lacklustre performance has likely intensified investor concerns that the reported financial results may no longer justify the current stock valuations.

FMCG companies reported a weak set of numbers, hindered by a slowdown in rural consumption, while banks are dealing with high slippages and deteriorating asset quality, both of which have unsettled investors.

Auto companies are also facing slower sales growth, particularly car makers, with subdued projections further dampening investor sentiment, triggering significant selloffs across the auto sector.

Crisil, in a recent report, stated that the revenue growth of Indian companies for the July-September quarter is estimated to be between 5% and 7% year-on-year (Y-o-Y), marking the slowest growth in 16 quarters.

FPI outflows hit record highs in October

Foreign Portfolio Investors (FPIs) withdrew a record ₹1.14 lakh crore from Indian equities in October, according to Trendlyne data. This marks the highest monthly outflow on record, surpassing the previous record of ₹65,816 crore during the COVID-19 pandemic in March 2020.

Throughout October, FPIs have remained net sellers in every trading session, with the largest outflow occurring on October 3, when they withdrew ₹15,506 crore. The combination of weak earnings reports and stimulus measures from China has prompted FPIs to shift their focus away from Indian markets, contributing to this unprecedented outflow.

The Indian markets would have experienced a more severe downturn if domestic institutional investors (DIIs) had not stepped in to buy stocks, matching the volume of selling by foreign portfolio investors (FPIs) and helping to mitigate the sharp correction. In October, DIIs bought ₹1.07 lakh worth of Indian stocks.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.