Stocks extend decline on weak global cues, valuation concerns
Indian stocks fell for the second straight day on Monday, extending Friday’s decline, as investors pondered over whether the stunning gains of the past few months have outstripped economic reality.
Investors and analysts are, however, clear that the current decline is unlikely to end up as a deep correction as the factors that powered the over 80% rally since March lows are intact. The rally took the benchmark Sensex to within sniffing distance of the 50,000 mark.
However, worried about expensive valuations and weak global cues, investors dumped stocks. The BSE Sensex fell 470.40 points, or 0.96%, to 48,564.27. The National Stock Exchange’s Nifty index fell 1.06% to 14,281.30.
Analysts said the sell-off in Indian markets does not look like the beginning of a sustained decline in stocks.
Valuations had become expensive on hopes of strong earnings revival in the year starting 1 April, according to Vinit Sambre, head of equities at DSP Investment Managers.
“The considerable rise in the last few months has led to some profit booking. Besides, most of the good news, including US election and stimulus announcements, is factored in the valuations. Lastly, rising global commodity inflation is likely to hurt margins of companies,” Sambre said.
While the correction in stock prices is a healthy sign, an unfavourable announcement in the budget may lead to deeper cuts, he added.
The Sensex is currently trading at 23.21 times one-year forward earnings, 44% higher than its 10-year average. The Nifty is currently trading at 22.17 times, 40% above its 10-year average.
However, comparing the price-to-earnings (PE) multiples alone will not provide a correct assessment as to whether valuations are stretched, said Pankaj Pandey, research head at ICICI direct. “The Nifty constituents have undergone a major change in the past decade and, hence, current and forward PE multiples have shifted to a higher orbit. Better-performing business segments within existing companies are not captured by current PE multiples,” he said.
Pandey believes that the sell-off in Indian markets is short-term and stocks will rally soon because of the consistent flow of foreign liquidity as central banks maintain ultra-loose monetary policy stance.
The Reserve Bank of India’s move to drain excess liquidity has, however, raised fears that the central bank is withdrawing stimulus support.
However, analysts said that they expect the lower interest rate regime to continue for some more time.
“As long as foreign money flow continues, Indian markets will remain high,” Pandey said.
Foreign portfolio investors bought $2.44 billion worth of Indian stocks so far in January after investing $23.4 billion in Indian shares in the previous year, the most in eight years.
Domestic institutional investors were, however, net sellers worth ₹12,323.3 crore in January. They sold shares worth ₹34,966 crore last year.
“In the near term, volatility could prevail in the run-up to the Union Budget, but we do not expect a major decline. A pullback of 5-6% post a sharp rally is actually a healthy sign. We continue to be constructive on markets and see the correction as an opportunity to accumulate quality stocks,” said Gaurav Dua, senior vice-president and head, capital market strategy and investments at Sharekhan by BNP Paribas.
Meanwhile, India VIX, the so-called fear index, rose 15.6% in January, the highest monthly gain since October. The volatility index typically has an inverse correlation with the direction of stock movements. The current rise in the fear index suggests that investors are losing confidence in the rally.