India's share market is currently in a bear phase and experts believe that the ongoing correction is far from over; they recommend that investors avoid making aggressive bets until there is a clearer understanding of the trend. The primary cause of the market meltdown is the underperformance of the mid-cap and small-cap indices, compared to large caps; this is likely to continue in the near-term till their valuation become attractive enough to bring back foreign institutional investors (FIIs) to D-Street.

While the equity benchmarks, the BSE Sensex and the NSE Nifty, are down 10% from their 52-week highs touched in September last year, the mid-cap 100 and small-cap 100 indices have corrected around 15% from their peak. On a year-to-date (YTD) basis, the sell-off persisted in the broader markets as the BSE mid-cap and small-cap indices lost 12% and 15%, respectively, while the Sensex and the Nifty50 regained the ground lost in the last quarter of 2024, and are down 2% YTD.

"The significant trend in the ongoing bearish phase of the market is the outperformance of large-caps over the broader market. While the Nifty Midcap and Smallcap indices are down 8.6% and 11.3%, respectively, YTD, the Nifty is down only 1.52%. This outperformance is likely to continue, going forward,” says V.K. Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

Historically, since 2002, bull market corrections have averaged 14%, while time-wise, the index has not recorded a negative monthly close for more than three to four months. Given the current 13% correction in place, the index has approached both price-wise and time-wise correction levels. “Over the past four months, the index has corrected 13%, absorbing pessimism around both global and domestic uncertainties, leading to bearish extreme readings on sentiment and momentum indicators, suggesting an impending pullback,” ICICI Securities said in a note.

Key reasons to suggest that the bear market is far from over

Higher valuation of mid-cap, small-cap stocks

The current market patterns indicate that the mid-cap and the small-cap stocks may encounter greater challenges in the coming period compared to large-caps, largely due to higher valuations and muted earning growth. Mid-cap and small-cap stocks have delivered about 24% returns to their shareholders with earnings growth of only 6%, indicating alarming valuation trends. On the other hand, large-cap valuations have moderated in the backdrop of the recent correction and improvement in their earnings per share.

“The relentless selling by FIIs in large-caps has made their valuations fair while the valuations of mid- and small-caps continue to be excessive. FIIs will certainly turn buyers in India; but that will happen only when the dollar index turns weak,” says Vijayakumar.

Sustained sell-off by FIIs

Foreign investors continue to sell Indian equities amid valuation concerns and mixed earnings reports. FIIs have sold equities worth ₹12,000 crore so far in February after net fund outflows of ₹87,374.66 crore in January. With a net outflow of ₹1,00,182 crore (₹1,55,764 crore in the secondary market and inflow of ₹55,582 crore in the primary market), the share of FIIs decreased to a 12-year low of 17.23% during the December quarter of FY25.

At the current juncture, market experts have recommended investors to buy quality large-caps in banking, IT, autos, pharma and capital goods and wait patiently. They believe that when FIIs turn buyers in India, which is inevitable, they will be buying the large-caps that they are selling now. For patient investors, this would be a good opportunity.

Looming global trade war amid US tariff plans

The persistent concerns about a looming global trade war amid US tariff plans have left investors jittery. Last week, US President Donald Trump said he would announce reciprocal tariffs on many countries, while he also proposed to impose additional tariffs on steel and aluminum imports. The continued uncertainty regarding the US tariff plans have soured investors’ appetite for riskier assets like equities and prompted them to shift focus to safer assets such as gold and dollar.

Amidst tariff-related anxiety, the US dollar index has reached close to the 110-mark as new taxes on Canada, Mexico, and China are fuelling inflation concerns, strengthening the dollar against major currencies. A higher US dollar index doesn’t augur well for emerging markets as it would put pressure on their domestic currency, including the Indian rupee.

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