Indian Equities Face Correction Amid Shifting Global Flows and Domestic Challenges – Over the past month, Indian equities have experienced a notable correction, driven by several factors impacting both global and domestic investor sentiment. One of the primary reasons behind this pullback is the significant outflow of Foreign Portfolio Investments (FPIs), with almost $10 billion exiting Indian markets. Some of these funds would have found their way to China, where the relative valuation attractiveness, coupled with stimulus measures from the Chinese government, has drawn investor interest. Though the fundamental and structural growth story of India remains far superior to China, global allocations in the short term, might follow relative valuation attractiveness that China offers against a backdrop of meaningful stimulus measures. Historically, such large-scale outflows have been seen during crisis years like 2020 and 2008, accompanied by a steeper market correction.

Despite this external pressure, the Indian equity market correction has remained somewhat contained, thanks to the continued support from Domestic Institutional Investors (DIIs). Their steady inflows have cushioned the impact of the FPI exodus, preventing a deeper decline.

On the domestic front, the 2nd Quarter earnings season have begun on a tepid note, highlighting the valuation concerns. The results thus far, have revealed a slowdown in both revenue and margin growth, contributing to investor caution. Among the top 500 listed companies, an overwhelming 88% have seen a correction, with stock prices falling between 5% and 50%. This widespread decline reflects the broader market challenges that investors need to navigate in the current environment.

In recent months, we’ve advocated for profit booking and a reduction in overall equity exposures, primarily due to concerns surrounding stretched valuations. Much like a sprinter running at full speed, Indian equity markets have experienced a rapid rally in the recent times. As the current headwinds—including significant FPI outflows, corporate earnings softness, and geopolitical uncertainties—begin to shape market sentiment, we foresee a period of near-term consolidation.

Markets would take a cue from the outcome of the upcoming U.S. Presidential elections in terms of incremental capital flows and sector preferences. While various market segments have corrected anywhere between 4% to 8%, they still aren’t attractive enough to warrant aggressive new investments. Thus, we suggest a cautious approach in the near term.

As an investor, maintaining flexibility and being mindful of the asset allocation is crucial. Systematic Transfer Plans (STPs) can be continued as a measured way to deploy capital in the market. It’s essential to shift large lump-sum allocations towards hybrid strategies, which offer a more balanced risk-return profile. Phased investments into large cap and Flexi-cap strategies are desirable, akin to pacing oneself in a marathon, ensuring exposure to quality companies that can withstand the longer journey ahead.

Key Takeaways

If the markets shift from the sprint-like market rally to a marathon-paced environment, it’s essential for investors to reassess their strategies. Here are the key takeaways to keep in mind:

1. Reevaluate Your Asset Allocation: Take a hard look at the current asset allocation and ensure it aligns with the long-term financial goals. With markets transitioning, the right allocation will be critical to weathering volatility
2. Temper Return Expectations: Avoid the trap of recency bias—just because the markets sprinted ahead recently doesn’t mean future returns will follow the same path. Prepare for a more measured pace ahead and adjust the expectations accordingly
3. Profit booking and Rebalancing: Most of the portfolios have benefitted from an early entry into this rally and hence, consider booking profits to align with the desired asset allocation. This is especially important given the current market headwinds. Moving profits into hybrid strategies such as Equity Savings, Balanced Advantage, and Multi-Asset funds can provide stability and diversification while still offering potential for growth.

Remember, just like in running, knowing when to sprint and when to settle into a marathon pace will help us stay in the race and reach our financial finish line.

Disclaimer:
Mutual fund investments are subject to market risks. Past performance is not an indicator of future returns. Equity market investments do not guarantee a fixed return.

The above note is prepared for the purpose of information sharing with the investors of Figital Technologies Pvt. Ltd. The data points are compiled from multiple sources with the objective of enabling the investors to take an informed decision regarding their investments. The views and commentaries expressed in the above note may or may not result in actual outcomes. While much care has been taken to present accurate and relevant information, Figital Technologies Pvt. Ltd or its partners cannot be held responsible for the authenticity of data. Investors are advised to reach out to us if they require additional input before taking an investment decision considering their risk appetite, Investment goals and time horizon. Neither Figital Technologies Pvt. Ltd nor its affiliates/partners shall be liable for any damages whether direct or indirect, incidental, or consequential including lost profits or lost opportunities that may arise from or in connection with the use of the information.