Selling started in stocks amid weak earnings, high valuations

Stocks succumbed to selling pressure for three consecutive days, plunging 2%, as panic gripped investors. On Thursday, the BSE Sensex slipped 336.46 points or 0.55% to close at 60,923.50. Nifty closed down 0.48% at 18,178.10.

Fund managers and analysts said that though the overall valuations look good, the valuations are still there.

“Though stocks with valuation rest are not readily available as in March-April 2020, there are pockets of value. Markets are heterogeneous. Not everything is cheap or expensive at the same time (except in times of severe global chaos like October 2008 or March 2020). Equity investments can be volatile in the near term as the intrinsic value of any investment is realized over the long term,” said Saurabh Gupta, Fund Manager Equity, Quantum Asset Management Company.

“The resurgence of Covid, the tapering of the US Federal Reserve and subsequent interest rate hikes and higher-than-expected inflation are some of the macro variables that could exacerbate market volatility over the next few months. Markets tend to move beyond fundamentals from time to time. The correction, especially in the small-cap sector, was going to happen for some time now.”

A new wave of Kovid infection is also scaring investors in some countries.

Russian President Vladimir Putin is considering imposing nationwide restrictions to curb the spread of the disease after 1,028 people died in the 24 hours as of Wednesday, media reports said.

Selling in the last three days has cut gains from the markets. Indian benchmark indices, which have outperformed global counterparts for the past several months, have risen 3% so far in October, underperforming the 4-5% gain in the MSCI World and MSCI Emerging Markets indices. Despite widespread optimism among investors till last week, Sensex and Nifty have lost nearly 2% since Monday, while stocks in BSE Mid and BSE Smallcap indices have also declined.

According to Siddharth Khemka, Head-Retail Research, Motilal Oswal Financial Services Ltd, the market is likely to strengthen on the back of weak global cues, current earnings season and higher valuations. Earnings declared so far have been mixed with cost inflationary pressures which are clearly visible on margins. “Since valuations are now at absurdly high levels, many stocks are priced for perfection, thus leaving little room for any gloom. Thus even the slightest deviation from expectations results in a rapid response. We would suggest traders to be cautious in view of the volatility being witnessed in the market.”

Binod Modi, head of strategy at Reliance Securities, said higher input costs have adversely affected margins and profitability of consumer and manufacturing firms despite stagnant volumes and sales growth. “This inevitably raises concerns about the sustainability of earnings rebound in subsequent quarters, which has weighed on sentiment. In our view, volatility is likely to persist with market volatility in the near future.”

Foreign institutional investors are net buyers of Indian equities worth $281.3 million this month. In contrast, domestic institutional investors have sold shares of value. ₹5,986.21 crore, first monthly sales in eight months.