India is currently wearing the unenviable crown of being the worst performing market amongst the top ten globally. For the first time in over a year, the nation’s market capitalisation has dipped below the $4-trillion mark, now standing at $3.91 trillion. This decline reflects a broader trend of Foreign Institutional Investors (FIIs) pulling back from emerging markets, choosing instead to reallocate their funds to the perceived safety of US equities and bonds.

Flight to Safety and Weak Earnings

India, which previously held a significant weight in the MSCI index, has seen sustained selling pressure from FIIs. This decision to withdraw is not solely based on global trends; domestic factors are at play as well. Disappointing corporate performance during the December quarter has provided further justification for this exodus. An analysis by Motilal Oswal Financial Services reveals a concerning trend of low single-digit earnings growth for Indian companies for the third consecutive quarter. The Nifty-50 index has only managed a meagre 4 percent growth in profit after tax (PAT) over the initial nine months of FY25. This is a stark contrast to the robust CAGR of over 20 percent witnessed between FY20 and FY24.

Sectoral Performance Mixed Bag

Delving deeper into sectoral performance, the picture remains mixed. Banking, Financial Services, and Insurance (BFSI), along with Technology, Telecom, Healthcare, Capital Goods, and Real Estate, have contributed positively to profit growth. However, global cyclicals, particularly within the oil and gas sector, have dragged down overall earnings. Oil marketing companies have experienced a year-on-year profit decline. The Cement sector has witnessed a dramatic 55 percent drop, Chemicals a 12 percent decline, and Consumer goods a 5 percent reduction in earnings. Report analysis shows large-cap companies performed as expected, mid-caps surpassed forecasts, but small-caps significantly underperformed, leading to market penalisation of smaller stocks.

Valuations and Future Outlook

Valuations for mid and small-cap stocks remain elevated compared to historical averages and command a premium over the Nifty 50. This valuation disparity further strengthens the preference for large-cap stocks in the current climate. The erosion of value, especially in the small-cap segment, is substantial. While some fund managers had flagged overvaluation concerns for some time, it took a broader emerging market selloff to trigger widespread investor unease in India. Fundamental analysts have cautioned about long-term market overvaluation, while technical analysts point to oversold conditions in the market for over a week.

As the old adage attributed to John Maynard Keynes goes, “Markets can remain irrational longer than you can remain solvent.” Perhaps the prudent approach is to await clear market signals of a turnaround rather than attempting to time the bottom. Is this a temporary dip or the start of a deeper correction? Time will tell, but caution is advisable for now.