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The Indian stock market experienced a dramatic turnaround on Friday, November 29th. Following a significant drop of approximately 1.5 percent the previous day, the Sensex and Nifty 50 indices surged by nearly one percent each during intraday trading. This rebound saw the Sensex reach 79,848.76 and the Nifty 50 climb to 24,144.45. The midcap and smallcap indices also experienced a positive upswing, gaining about half a percent. The overall market capitalization of BSE-listed firms increased by approximately ₹3 lakh crore, a testament to the swift market recovery. However, despite this positive movement, experts remain cautious, predicting continued volatility in the short term due to several persistent headwinds.
A primary factor contributing to the recent market fluctuations is the activity of Foreign Institutional Investors (FIIs). FIIs have engaged in significant selling, partly attributed to weak Q2 earnings and heightened geopolitical uncertainties. Kunal Mehta, Associate Director at Equirus, points to the Nifty 50's 6 percent October decline after a prolonged bull run as evidence of this trend. He emphasizes the impact of FII withdrawals due to relatively high valuations in the Indian market compared to global counterparts, coupled with a slowdown in urban consumption and sluggish government spending during the first half of the current financial year. This slowdown is linked to factors such as elections and heat waves.
G. Chokkalingam, founder and head of research at Equinomics Research Private Ltd., further underscores the role of FII selling, linking it to the strengthening dollar. He suggests the potential return of Donald Trump as US President is fueling expectations of a robust US economy and currency, causing nervousness among foreign investors. This ‘Trump factor’ introduces an element of uncertainty, with Chokkalingam noting that the market hasn't fully discounted its potential impact on India, leaving the future implications unclear for both the overall market and specific sectors. The seemingly erratic behavior of FIIs, with periods of buying followed by substantial selling (such as the ₹11,756 crore sell-off), is perplexing experts. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, highlights this unpredictable nature, questioning the underlying factors and whether this volatility is a temporary phenomenon or a harbinger of further market fluctuations.
Beyond FII activity, other headwinds continue to influence market performance. Geopolitical tensions remain a concern, adding to the existing pressure from weak corporate earnings and uncertainty surrounding the trajectory of US interest rates. This complex interplay of factors creates a challenging environment for investors. However, despite the current corrective phase, which might tempt some to book profits at every market rise, experts advocate a long-term perspective. Amar Ambani, Executive Director at YES SECURITIES, advises against a purely ‘sell-on-rise’ strategy, suggesting that the market presents opportunities to acquire undervalued assets. He anticipates that the earnings slowdown might partially alleviate in Q4, driven by increased government spending and a revival in urban consumption.
Specific sector recommendations vary among experts. Kunal Mehta recommends focusing on sectors aligned with the rural economy, leveraging the positive impact of good monsoons and government subsidies on rural incomes. He also highlights the potential for growth in the pharma and healthcare sectors (hospitals and diagnostics), as well as large banks due to increased deposit growth. In contrast, V K Vijayakumar suggests a more cautious approach, recommending a ‘buy-on-dips’ strategy primarily for investors with a medium-to-long-term outlook. He suggests focusing on large-cap stocks within the financial, IT, capital goods, and telecom sectors for long-term accumulation. The overall message from the experts is clear: despite short-term volatility, a strategic long-term approach remains the most prudent investment strategy in the current market climate.