The Indian stock market witnessed a significant fall on Friday, July 19, 2024, with major indices posting notable losses. The Nifty 50 fell to 24,530.90, down 269.95 points from its all-time high of 24,854. The Sensex lost 739 points, falling from an all-time high of 81,587 to 80,604. This bloodbath wiped out nearly INR 8 lakh cr from the market, prompting investors to be cautious.
When markets opened on July 22, both the Nifty 50 and the BSE Sensex saw spikes in intraday trade, before closing the day marginally higher, up 0.09% and 0.13% respectively, as investors remained in a wait-and-see mode ahead of the Union Budget 2024 scheduled to be presented on July 23.
Below is an overview of the possible reasons for the market decline and the outlook for investors.
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Why is the market falling? Top reasons for the fall in Indian stocks
The Indian stock market had been bullish for some time, pushing indices to new all-time highs. Such an uptrend often leads to a correction phase as market participants reassess their valuations and take profits. The sustained rise had built up pressure for a pullback, making the current dip a natural reaction to the previous rally.
- Extended rally: The prolonged bullish phase created an environment where stocks were trading at peak levels. This kind of momentum often results in a market ripe for a correction.
- Profit taking: Investors started taking profits by recognizing the high market levels. This increased selling pressure led to a broad decline across all sectors.
- Reassessment of valuations:As prices reached new highs, there was a growing need among market participants to reassess stock valuations, leading to a more cautious approach and subsequent selling.
- Weak global signals: Weak global signals played a major role as negative developments in major economies and unresolved geopolitical tensions led to a lack of confidence among investors globally. This global uncertainty created a domino effect, which impacted markets including India and contributed to the market decline.
- Caution is advised before the budget: Moreover, caution ahead of the Union Budget announcement led to investors adopting a risk-averse approach. Concerns about possible changes in tax policies, government spending and sector-specific reforms created uncertainty and reduced market activity. Expectations of fiscal policy decisions and their impact on various sectors contributed to the cautious sentiment, further pressuring the market.
- IT failure: An IT outage that disrupted trading systems, causing delays and increased market instability, compounded these problems. The technical glitch reduced liquidity and undermined investor confidence in the market’s infrastructure, exacerbating the decline.
Overpriced stocks
Many stocks in the Indian market are trading at high valuations, which are becoming increasingly difficult to justify based on their fundamental performance. High price-earnings (P/E) ratios and other valuation metrics indicate that several stocks are overpriced. Concerned about the unsustainable valuations, investors started selling stocks to lock in profits, contributing to the broader market decline.
- High price/earnings ratios:Several stocks traded at high price-earnings ratios, suggesting investors were paying a premium for future growth that may not be sustainable.
- Fundamental decoupling:The discrepancy between stock prices and the company’s fundamental performance raised concerns about the sustainability of high valuations.
- Market sentiment: Sentiment turned negative as more investors realized that many stocks were overpriced, leading to a sell-off.
Influence of the options market
The options market also played a crucial role in the recent market move. A high concentration of call options at various strike prices created an environment in which market makers had to cover their positions by selling the underlying stock. This dynamic put downward pressure on the market as options expiration dates approached, exacerbating the decline.
- Options Expiry Date:The approach of option expiration dates often leads to increased volatility as market makers and traders adjust their positions.
- Hedging activityTo hedge their positions, market makers had to sell underlying stocks, increasing downward pressure on the market.
- Market dynamics:The interaction between the options market and the underlying stock market created a feedback loop that contributed to the decline.
Stocks that have suffered a significant decline
Several prominent stocks suffered significant losses on Friday, contributing to the overall market decline:
- Adani Companies: Down 2.80% to close at 3,005.70. As a heavyweight in the market, Adani Enterprises’ decline had a significant impact on the overall market sentiment.
- Permanent systems: Down 6.39% to close at 4,583.45. Persistent Systems’ sharp decline underscored concerns in the technology sector.
- Cummins India: Down 6.25% to close at 3,559.45. Cummins India’s decline underscored broader concerns in the industrial and manufacturing sectors.
- MCX India: Down 5.99% to close at 3,824.15. MCX India’s decline reflected broader market concerns, particularly in the financial and commodity sectors.
- Dixon Technologies: Down 5.68% to close at 11,267.20. Dixon Technologies’ significant drop pointed to issues with consumer electronics and manufacturing.
- NMDC: Down 5.43% to close at 228.76. NMDC’s decline was a sign of concerns in the mining and metals sector.
- Tata steel: The stock fell 5.16% to close at 157.77, underscoring concerns about the steel and broader materials sectors.
These stocks, among other things, saw a significant drop in price, which contributed to the negative sentiment and the overall downturn in the market.
On July 22, BSE Mid-cap, BSE Small-cap and Nifty Auto rose amid volatility. The stocks that lost gains include:
- Wipro: Down 9% after disappointing quarterly results.
- Reliance Industries: Down nearly 3.5% due to declining quarterly and annual operating results.
- Kotak Mahindra Bank: Down around 3% despite a solid earnings report as brokers raised concerns over disappointing net interest margins amid rising costs and headwinds from the Reserve Bank of India that could weaken lending.
What awaits investors?
Experts say that the market has seen a significant rise after the recent election results, mainly driven by increased liquidity. This rise has been accompanied by a notable increase in market volume and valuations, something that is unsustainable in the long run.
India’s market cap/GDP ratio is approaching 150%, second only to the US, which is above 200%. This figure is significantly higher than India’s 10-year average and is also notably higher compared to China, which currently has a market cap/GDP ratio of 47%.
Sunil Damania, Chief Investment Officer, MojoPMS, believes that the US can sustain a higher market cap-to-GDP ratio due to its capital account convertibility and strong appeal to international investors. This is not entirely true for India.
Another key metric, the trailing twelve months (TTM) price-earnings (P/E) ratio, indicates that the Indian market is richly valued and currently trades at 30x earnings. This high valuation leaves little room for error.
Investors are advised to focus on:
- Diversification: Maintaining a diversified portfolio to limit risks.
- Appreciation awareness: Pay attention to the valuation of shares and avoid overpriced shares.
- Market dynamics: Understanding the influence of market instruments such as options on stock prices.
- Long term perspective: Maintain a long-term investment horizon to withstand short-term volatility.
While the current market downturn presents a challenge, it can also present opportunities for savvy investors to buy quality stocks at more reasonable valuations.
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Conclusion
The fall of the Indian stock market on July 19 and the continued downward trend on July 22 can be attributed to a combination of factors: the market had reached high levels, many stocks were overvalued and the dynamics of the options market played a major role. As the market adjusts to these factors, investors should remain cautious and reassess their portfolios to weather this period of volatility.
