Markets
Indian Stock Market In Turmoil. Investors In Panic Mode, Is This A Temporary Correction Or The Start Of A Bear Market?
There are signs of a bear market, the Indian stock market has been experiencing a turbulent phase, with investors—especially mutual fund participants—growing increasingly anxious. Typically, direct stock investors are the first to react to market downturns, while mutual fund investors remain relatively insulated. However, the current situation has flipped the script, raising concerns about the broader market outlook.
The Worst Run in 25 Years?
Recent reports indicate that Indian stocks are witnessing their worst performance in 25 years, with market indices like the Nifty 50 and Sensex sharply underperforming compared to global counterparts. According to data, while indices like the German DAX, Hong Kong’s Hang Seng, and the Dow Jones have seen gains of up to 2%, Indian markets have plunged by nearly 13-14% since October last year.
A particularly alarming trend is that the Nifty 50 has now recorded five consecutive months of losses—something that has happened only once before, in 1996. This prolonged downturn is unsettling for investors who have long considered India a resilient market capable of outperforming global peers.
The Foreign Investor Exodus
One of the primary reasons for this downturn is the significant outflow of foreign institutional investments (FIIs). In just two months—January and February—foreign investors pulled out a staggering $25 billion from Indian equities. Historically, FIIs have played a crucial role in market stability, and their exit has triggered a domino effect, leading to heightened uncertainty among domestic investors.
Conversely, domestic institutional investors (DIIs), such as mutual funds and insurance companies, have attempted to offset these outflows, but their buying has not been sufficient to stabilize the market. The net impact has been increased volatility and sustained downward pressure on stock prices.
The Mid-Cap and Small-Cap Carnage
The ongoing market correction has disproportionately impacted mid-cap and small-cap stocks. These segments have seen a drastic decline, with mid-caps down 20% from their highs and small-caps witnessing a 26% drop. According to financial analysts, a decline of this magnitude in mid-cap stocks signals a bear market rather than a routine market correction. The correction is particularly severe because these segments had been experiencing significant gains in 2024, despite corporate earnings failing to justify their elevated valuations.
Sectoral Performance. Who’s Holding Up and Who’s Crashing?
A sector-wise breakdown reveals that some industries have managed to fare better than others. Private banks and financial institutions have shown relative resilience, though future expectations for these sectors remain weak. On the other hand, industries such as real estate, PSU banks, FMCG, energy, auto, and pharma have been among the worst performers in February, indicating the depth of the market-wide selloff.
Moreover, blue-chip stocks—considered the backbone of Indian equities—are not immune to this downturn. Large-cap stocks like HDFC, Axis Bank, Bajaj Finance, Mahindra & Mahindra, ITC, and Infosys have all suffered losses, indicating that even the most stable market players are under pressure.
What’s Driving the Market Selloff?
There are multiple factors contributing to this prolonged decline –
1) Weak Corporate Earnings: The biggest concern is slowing corporate earnings growth. The Nifty 50 companies reported an average profit growth of just 5% for the October-December quarter, marking the third consecutive quarter of single-digit growth. In contrast, the market had experienced strong double-digit earnings growth in the previous two years.
2) Falling Urban Demand: The slowdown in consumer spending is evident. With rising inflation, stagnant salaries, and skyrocketing costs in essential services like healthcare and education, discretionary spending has taken a hit. This has directly impacted companies that rely on strong consumer demand to drive revenues and profits.
3) High Inflation and Cost of Living: While official inflation figures may suggest moderation, the reality for average consumers tells a different story. Essential expenses such as medical costs have increased by 14%, and education costs have risen by nearly 15% per year. With disposable incomes shrinking, people are cutting back on non-essential spending, which in turn affects business profitability and stock valuations.
4) Global Economic Headwinds: The performance of key sectors in India is heavily influenced by international markets. Sectors like oil and gas, pharmaceuticals, and IT have struggled due to weak global demand and policy uncertainties in major economies like the U.S. and China. The Federal Reserve’s stance on interest rates and geopolitical tensions have added to investor concerns.
Should Investors Panic?
Given the current scenario, what should investors do? If history is any guide, every major market downturn has eventually been followed by a recovery. However, the timing and nature of that recovery remain uncertain.
Long-term investors should stay the course. Those investing via systematic investment plans (SIPs) in mutual funds should continue their investments, as downturns present opportunities for cost averaging.
Short-term traders should exercise caution. With volatility expected to persist, traders must be prepared for sharp swings in both directions.
Sectoral opportunities exist. Defensive sectors like FMCG and pharmaceuticals may be better positioned to weather the storm compared to cyclical sectors like real estate and automobiles.
