It was a meltdown on the Street with the Sensex crashing 1,158 points, or -1.89%, to 59,984, and the Nifty, too, plummeting 354 points, -1.94%, to 17,857 led by a cocktail of profit booking, expiry of the current month F&O series and warnings over valuations.
Both the Sensex and the Nifty hit their all-time closing highs in the middle of October, and since then have been heading south as a spate of reports from foreign brokerages raised concerns over India’s premium valuations to other emerging markets. For instance, Morgan Stanley (MS) analyst Daniel Blake said in his report that though MS sees a structural multi-year earnings recovery at 24x one-year forward P/E, the Indian market could see a consolidation ahead of an expected Fed tapering, the possibility of a repo rate hike by the Reserve Bank of India in February and higher energy costs.
Niall MacLeod, strategist at UBS, had earlier this week downgraded India, even as China was given a bump-up over its relative underperformance to other Asean and Asian markets. Also as feared, the contagion impact of Evergrande’s bankruptcy crisis on the Chinese banking system seems to have blown over—at least for now. MacLeod wrote in the report that the relative valuation of India to Asean — two areas with similar growth dynamics and occasional perceived macro vulnerabilities — looks too wide to justify. “We note that both in India and Taiwan, retail investors have played an outside role, which while difficult to predict in terms of reversing, creates an additional potential headwind if this demand unwinds,” wrote MacLeod.
Back home, MS India analyst Ridham Desai, in a note to clients, highlighted that the MSCI India index had generated 26% return over the past six months, outpacing the MSCI EM index by 30% over the same period. Desai believes the strong outperformance of Indian markets was partly owing to bullish consensus earnings expectations of 34% year-on-year growth for 2021 and 18%-plus for 2022, and a favourable reform agenda. Though a recovery in the capex cycle, government policy push, and a robust global growth outlook are expected to result in earnings compounding at over 20% per annum for the next three-four years, immediate concerns remain over valuations. Both UBS and MS prefer other Asean markets and China over India. “Hong Kong, Malaysia, Indonesia and The Philippines all negatively impacted and have de-rated, but among other factors our model sees stronger prospects for Indonesia, which we upgrade to overweight,” stated Blake in his report.
In fact, foreign institutional investors [FIIs] have been net sellers in October, pulling out over ₹11,114 crore in the current month, though year-to-date they have been net buyers of equities at ₹53,159 crore. What is also rattling investors is that India Inc. after a relatively stronger performance in FY21 are facing a headwind from rising commodity costs, which may also prompt the RBI to hike rates. The central bank has so far been pursuing a more accommodative policy stance to aid an economic recovery. But that is slowly changing. The market expects the RBI to absorb excess liquidity (of over ₹10 lakh crore) from the banking system, which also could have impacted sentiment. In fact, banking stocks, which have a heavy weightage on the index were under pressure with the Bank Nifty crashing over 3% to 39,508 after hitting a record high this week with ICICI Bank. HDFC Bank and Axis Bank proved to be the biggest drag.