Moneycontrol Pro Panorama | Markets are standing at a fork on eve of Samvat 2081

A fall in the markets could cut off the source of demand.

On the eve of Samvat 2081, after an excellent year, the mood in the markets is downbeat. The markets have taken everything that could be thrown at them over the last few years -- the pandemic, supply chain disruptions, wars both hot and cold, spiralling inflation, monetary policy tightening, the unravelling of globalisation -- and emerged triumphant. But that defiant spirit seems to have dimmed.

Perhaps they are just tired after a stellar run. Perhaps they are resting a bit, waiting till the uncertainty of the US elections blows over. If it’s just a pause that refreshes, there’s nothing much to worry about. Many analysts have called it a healthy correction.

But there’s a suspicion that it could be more than that. As we pointed out in our Chart of the Day, there have been sharp cuts in analysts’ earnings estimates that are set to drag the markets lower. A recent Jefferies report says their analysts ‘’have cut FY25 earnings estimates for over 60% of the 98 covered cos reporting so far - highest downgrade ratio since early 2020.’’

The September quarter corporate earnings season show signs of a slowdown. The early results show lower sales growth for the non-finance corporate sector, according to CMIE data, and there has been a fall in aggregate net profits from a year ago. There have been many reports of a slowing of urban demand and we had listed several reasons why it’s happening. We had also pointed out that while there are reports of improving rural demand, that was probably on account of higher borrowing. And with the Reserve Bank of India clamping down on unbridled loan growth, that may very well affect rural consumption too. My colleague Dinesh Unnikrishnan’s interview of Keertana Finserv MD Padmaja Reddy revealed that microfinance borrowers are seriously over-leveraged, with more than half of them having between 6 and 15 loans, with their EMIs far exceeding their household incomes. Clearly, the crisis in microfinance could affect rural borrowing and therefore consumption. The latest RBI data show that, as on October 18, year-on-year growth in scheduled banks’ credit outstanding had decelerated to 11.5 percent.

Analysts have been talking of a “time correction’’. A note by Emkay Research says, “We believe that Indian equities will time-correct through 2HFY25 with extreme volatility.’’ Note, though, that the Nifty is currently at levels that it had reached in early July this year, so we’re already four months into a time correction. Many small and mid-cap stocks have seen far greater falls. It’s very likely that the sharp profits made in the markets had led to a wealth effect, which was probably behind the spurt in premiumisation. A fall in the markets could cut off this source of demand.

But Diwali is a time for new beginnings, new hope. Let’s look at the glass-half-full view. For starters, both the Reserve Bank of India as well as the finance ministry have said that the slowdown in the September quarter is temporary, due to unusually heavy rains and Pitru Paksha—a period deemed inauspicious for making big purchases by devout Hindus. They have said that the good kharif crop will stoke rural consumption. The India Flash Purchasing Managers index for October has signalled a return of momentum for the economy, at least for the top firms. The RBI’s survey of capacity utilisation in the manufacturing sector found that seasonally adjusted capacity utilisation in Q1, FY25, was the highest since the third quarter of FY19, indicating a revival of corporate capex is on the cards.

It goes without saying that massive FII sales have been behind the fall in the benchmark indices. But a look at the MSCI indices shows it’s not just the Indian market that is having a bad October. As on 30th October 2024, MSCI India was down 7.4 percent in USD terms, MSCI China was down 5.4 percent, Malaysia lower by 8.1 percent, Korea fell by 5.99 percent and MSCI Emerging Markets ex-China is down by 3.5 percent. In fact, developed markets too have been affected as there has been a flight to safety before the US elections, which is also seen from the spike in US bond yields and in gold prices. And in India, as we pointed out here, domestic investors are a big stabilising factor, continuing to cushion market declines.

Globally, too, there are several positives. First, inflation is waning, and rate cuts will support markets. Global growth seems to have bottomed out. Crude oil prices have shifted lower, in spite of all the mayhem in the Middle East.

The bottomline, as this column says, is : “India’s long-term growth prospects remain intact, and any short-term volatility introduced by triggers such as the US elections, should be used as opportunities to accumulate fundamentally strong businesses at attractive valuations.’’ Look no further than our Moneycontrol Pro Diwali 2024 portfolio, hand-picked by our independent research team, for such fundamentally strong businesses in Samvat 2081.

I wish you a happy and prosperous Diwali.

What else are we reading?

Benjamin Button’s clues for the US economy (republished from the FT)

Technical Picks: JUBLPHARMA, SKIPPER, EIDPARRY, L&T.