Friday's Sensex Crash: Anything To Worry?

'The economy is clearly at a very soft spot, and earnings growth is disappointing every day.'
'After three great years, the Indian economy has hit a rough patch.'

Benchmark equity indices retreated nearly 1 per cent on Friday, October 25, 2024, to log their worst weekly losing streak in 14 months amid sustained selling by overseas investors and earnings disappointments from major firms.

Concerns over high valuations only compounded the downward pressure.

Following a 663-point drop, or 0.8 per cent decline, the Sensex ended at 79,402 -- its lowest closing level since August 14.

It is also the first time since then that the 30-share index has closed below the 80,000 mark.

The Nifty 50 index ended 219 points (or 0.9 per cent) lower at 24,181.

For the week, the Nifty 50 and the Sensex declined by 2.7 per cent and 2.2 per cent, respectively, marking a fourth straight weekly loss and their longest weekly losing run since August 2023.

From their recent highs, the Sensex and Nifty have now slipped 7.6 per cent and 8 per cent, respectively.

Broader market indices mirrored Friday's decline, with the Nifty Midcap 100 and Nifty Smallcap 100 down 1.9 per cent and 2.2 per cent, respectively.

Meanwhile, the volatility gauge, India VIX, rose 4.7 per cent to 14.6, highlighting heightened market uncertainty.

The selloff on Friday erased approximately Rs 6.8 trillion ($5.2 billion) in market capitalisation across all BSE-listed companies, bringing the total to Rs 437 trillion ($5.2 trillion).

The month-to-date decline in Indian market capitalisation stands at Rs 37.4 trillion, underscoring the scale of the recent correction.

The disappointing earnings reports have prompted analysts to trim earnings estimates for 2024-2025 and 2025-2026, leading to a market valuation re-rating.

"The economy is clearly at a very soft spot, and earnings growth is disappointing every day. After three great years, the Indian economy has hit a rough patch," said Saurabh Mukherjea, founder and chief investment officer of Marcellus Investment Managers.

"We are looking at zero or near-zero earnings growth -- something we haven't seen for several years."

Foreign portfolio investors (FPIs) have intensified their selloff of Indian stocks, spurred partly by economic stimulus measures in China, which has diverted global capital flows toward Chinese equities.

FPIs have net sold Rs 85,790 crore worth of Indian shares so far this month, exacerbating the impact of weak earnings.

"A distinct change in the long-term market trend is discernible from recent market movements," said V K Vijayakumar, chief investment strategist at Geojit Financial Services.

"With sustained and unprecedented FPI selling, the buy-on-dips strategy is not working. The consensus downward revision in FY25 earnings estimates and weak Q2 numbers have soured the sentiment -- to slightly bearish mode."

A close-to-call US presidential election has added another layer of uncertainty, with market participants wary of potential inflationary risks stemming from proposed tariffs and tax policies championed by Republican candidate Donald Trump.

In addition, a muddled outlook on US rate cuts is adding to the risk-off sentiment.

The 10-year Treasury yield in the US was at 4.19 per cent, compounding the cautious mood.

The market breadth reflected broad-based weakness, with 3,101 BSE stocks declining and only 841 advancing on Friday.

Feature Presentation: Ashish Narsale/Rediff.com