Markets wrapped up Friday on a mildly optimistic note, but risks still loom over investor sentiment as mixed earnings and a not-so-bright festive season forecasts dim the overall outlook
Friday brought some relief to the markets as benchmark indices edged up slightly higher, breaking the losing streak of recent trading sessions. However, the ongoing resurgence of China continues to pull foreign investor flows. And, if domestic investors thought this was the only setback, they’re likely mistaken. The second-quarter earnings season is off to a not-so-cheerful start and analysts are already skeptical about the upcoming festive season.
This was quite evident during Bajaj Auto's recent earnings call, wherein the management pointed out weak demand play during the festive season, which further dampened the sentiment. As more companies begin releasing their quarterly results over the coming weeks, all eyes are now on what cues will guide the mood of the market.
In October, the BSE Sensex plummeted by more than 3,000 points, marking a drop of over 5 per cent from the fresh highs it touched just last month. NSE Nifty experienced a similar trajectory and slipped by over 3.5 per cent or around 933 points, so far this month. While the FII sell-off weighed heavily on the overall sentiment, DIIs (Domestic Institutional Investors) stepped in to keep the markets resilient.
However, as for now, things aren't looking great for markets. Besides domestic factors, global issues are also contributing to the dim outlook.
And when it comes to global outlook, it's not just about geopolitical tensions or supply chain disruptions but a broader trend which is being played out on a macroeconomic level. According to analysts, the global market is moving away from a period of high inflation and interest rates to a more normalised economic ground. And this shift is raising worries around a possible economic slowdown, eventually making investors more cautious in the near-term play.
"The global market is transitioning from a period of high inflation and elevated interest rates to a more normalized economic environment, introducing the risk of a slowdown increasing the likelihood of short- to medium-term risk aversion," said Vinod Nair, Head of Research, Geojit Financial Services. While the RBI maintained its pause stance in the recent MPC interest rate meeting, high inflation levels might take a toll on demand levels. It is worth noting that CPI inflation stood at a nine-month high of 5.49 per cent in September.
Nair also pointed out that on a domestic level, India has already benefited from a period of economic abundance, with premium valuations and outperformance compared to other Asian markets since 2021.
For quarterly earnings, Q2 is expected to show some improvement in earnings as compared to Q1. However, early previews suggest that the recovery might remain muted. Analysts believe that while the market is hopeful for a stronger Q3 and Q4, the risk of downgrades in the short term is likely to remain.
Major companies like Wipro and Nestle, which have recently announced their results, are already facing downward ratings by brokerages.
The recent trajectory of the market has put forward multiple outlooks. While some remain optimistic about a potential correction, others still raise the banner of overvaluation during market highs.
"The bearish mood in India's stock market could persist, especially as domestic economic challenges continue to weigh on investor sentiment. If corporations report disappointing earnings, it may further erode confidence," said Amit Goel, Co-Founder and Chief Global Strategist at Pace 360.
According to a report by Elara Securities, the momentum of inflows into India-dedicated funds has slowed for the first time since 2022, following a surge of inflows that began in January 2023. This decline in inflow momentum is the sharpest seen since the periods of April 2010, June 2015 and January 2018.
Right now, caution largely remains the call of the market but analysts are optimistic about the long-term outlook.
"In the worst-case scenario, we do not expect more than a 10-12 per cent correction in the domestic market, as India’s long-term outlook remains strong with a projected GDP growth of 6-7 per cent. However, short-term gains are likely to be capped at 5-6 per cent due to premium valuations and the potential slowdown in earnings," Nair said.
While the festive season could offer a short-term boost, geopolitical and macroeconomic factors may prevent a full recovery, keeping the market volatile for the foreseeable future, said Narinder Wadhwa, MD and CEO, Ski Capital Services.