Stock sell-off continues amid steep valuations

The BSE Sensex shed 2.5% this week, the steepest plunge since the week ended 27 February. On Friday, the BSE Sensex fell 1.13% to 59,306.93 while the Nifty fell 1.04% to 7,671.65.

In October, foreign institutional investors (FIIs) and domestic institutional investors (DIIs) remained heavy sellers, with FIIs selling local shares worth $1.21 billion, the first monthly sell-off since July.

Domestic institutional investors, including mutual funds, insurance companies, pension funds and banks, sold shares worth ₹5,986.21 crore in the month.

This is the first month that DIIs have been net sellers since February.

On Thursday, Morgan Stanley, following similar moves by Nomura and UBS, downgraded Indian equities to equal-weight from overweight, citing expensive valuations and concerns over potential “short-term headwinds”.

However, the Indian volatility index or India VIX fell 2.72% on Friday, indicating investor anxiety and nervousness may have eased out for the moment.

India VIX is down 38% from the high it touched this year at 28.14 on 26 February.

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“The valuation risks have been one of the main concerns for foreign investors, triggered by the downgrading of Indian equity markets from “overweight” to “neutral” by key global brokerages,” said Joseph Thomas, head of research at Emkay Wealth Management. “The valuation risks are specifically coming to the fore now as a few sections of the markets expect growth momentum to slow in the wake of sticky inflation.”

Indian stocks have been under constant pressure through most of October, following downgrades by global brokerages which have raised concerns of steep valuations.

In October, Indian markets underperformed global peers, with the Sensex and Nifty rising 1%.

The MSCI World and MSCI Emerging Markets indices were up 6% and 2% in comparison.

According to V.K. Vijayakumar, chief investment strategist at Geojit Financial Services, the downgrade by global brokerages due to rich valuations may have prompted FIIs to sell on a sustained basis. “FIIs have been sellers in software to the tune of ₹5,406 crore during the first half of October. This is profit booking since they are sitting on big profits. However, they have been buyers in banks and autos, where there is valuation comfort,” he said.

“Three IPOs are expected to raise ₹30,000 crore from the market in the next few days. These IPOs are expected to get heavily oversubscribed, and therefore there will be a huge drain of money from the secondary to the primary market. This is another factor prompting FIIs to sell. Due to big FII selling, markets have turned distinctly weak,” Vijayakumar added.

“Our emerging market exposure is lighter than usual. China has gone through some volatility in the recent past leading to a near-term concern about keeping exposure nominal. However, India provides a really interesting opportunity. The economy is moving along pretty well. The markets have priced in a lot of anticipated hikes from the central bank,” said Rick Rieder, chief investment officer of global fixed income at BlackRock Inc., at a Morningstar Investment Conference. Analysts said that decisions of the US Federal Reserve in its meeting next week would be a major factor that will drive global equities in the coming days.

Global markets too turned negative on Friday even as the European Central Bank decided to keep policy rates unchanged in its latest policy review.