Explainer: Sensex loses 3,200 points in 6 days, investors poorer by Rs 18 lakh crore: What's ailing the market?

Investors in BSE-listed stocks have collectively become poorer by around Rs 3 lakh crore today, and by Rs 17.8 lakh crore in the last six trading days
India's stock indices have corrected by around 5% in six trading days
India's stock indices have corrected by around 5% in six trading days

India’s equity market saw another day of mayhem with the benchmark indices - NSE Nifty50 and BSE Sensex - plummeting 1.4%. The Nifty50 gave up 265 points to end at 18,857 while the Sensex shed 901 points. This takes the total decline in Nifty 50 to 934 points in the last six sessions.

This significant correction of about 5% can be attributed to the growing tensions in the Middle East and its potential impact on the global economy. The selling has also been encouraged by a range of other developments, some of which can be attributed to the Israel-Hamas conflict.

Owing to the six-day selling spree, investors in BSE-listed stocks have collectively lost Rs 17.8 lakh crore as the overall market capitalisation of all BSE-listed firms fell to Rs 306 lakh crore from Rs 323.8 lakh crore. Today alone, investors’ lost around Rs 3 lakh crore.

"Investors are worried about the simmering West Asia conflict, economic uncertainty and rate hike woes, and hence maintained their bearish stance for the sixth straight session,” said Shrikant Chouhan, Head of Equity Research (Retail), Kotak Securities, adding that monthly F&O expiry also contributed to the sell-off in frontline stocks, such as those in banking, automobile and IT sectors.

We look at details as what is causing jitters among the investors:

Israel-Hamas Conflict: Equity market analysts believe that if the Israel-Hamas conflict grows into a bigger regional crisis in the Middle East, it may create an environment of uncertainty for the global economy as the region is the biggest producer and exporter of oil. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said that the conflict continues to be a major headwind for markets. If the conflict lingers for long it has the potential to impact global growth too, when the global economy is already in the midst of a slowdown.

Oil price and Inflation: The rising tension in the Middle East has led to increased volatility in crude oil prices. Even as the oil prices have softened in the past few days after hitting the $90 per barrel mark last week, there is increased fear of it going up again because of the conflict. This may put pressure on economies which trying to curb rising inflation. In India, rising oil prices could have a negative impact on economic growth in the short term, as high inflation and low profitability in various sectors would hit disposable incomes and discretionary spending. This is a big negative for the equity market.

Rising Bond Yield: The 10-year US Treasury yields surged again on Wednesday, edging closer to its 17-year high of 5%. This has increased fear that the high-interest rates regime would continue. Vijayakumar said that in the near term, the strongest headwind for the market is the stubbornly high US bond yields. With the 10-year bond yield at nearly 5%, foreign portfolio investors (FPIs) are likely to be in the sell mode. Sectors like banking and IT which constitute the largest segments of the asset under management of FPIs are likely to be under pressure. When bond yield rises, investors tend to transfer their exposure from riskier assets such as equities to safer avenues such as government bonds, he added.

Global Markets at Turmoil: Deepak Jasani, Head of Retail Research, HDFC Securities, said that Asian stocks slid to 11-month lows and European shares dropped on Thursday, hit by a rise in US Treasury yields, a slew of weak earnings reports with an ECB meeting and the release of U.S. GDP to come later in the day. After a sharp fall in US equity on Wednesday, major global indexes, including India, were either trading or closed in red on Thursday. US benchmark S&P 500 index fell for the fifth time in six days to close below the 4,200 level while the tech-heavy Nasdaq Composite slumped sharply following a below-par earning reported by Alphabet, the parent firm of Google. Most European markets were trading with cuts on Thursday while the South Korean and Japanese markets fell in the range of 2-3%.

Muted earnings in the September quarter: Vinod Nair, Head of Research at Geojit Financial Services, said that to date, the actual domestic Q2 results are below par in comparison to the excited earnings forecasted. “Similar disappointments are visible in developed economies. Downgrade in earnings and valuation is arising due to risk of further slowdown of the economy due to geopolitical and elevated interest rates. Also selling pressure intensified due to expiry-led volatility influencing investors to stay cautious," said Nair. So far this earnings season, the IT pack has reported below-par numbers while the banking and the FMCG companies have missed on certain parameters.

High Valuation Concerns: Nifty50, trading at a trailing 12-month (TTM) price-to-earnings (P/E) multiple of 22.22 as of October 23, is one of the most expensive equity benchmarks in the world. Some experts also note that the current headwinds from the global cues are allowing investors to reduce their exposure to the highly expensive Indian market. Mukesh Kochar, National Head of Wealth at AUM Capital, said that the market was looking for some reason to correct as the valuation was not comfortable and finally, that correction happened. He added that the market may look reasonable in terms of the valuation if Nifty corrects 300-400 points more from here and geo-political risk stablises although no one can predict the top or bottom in the short term.

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