Benchmark stock indices lost nearly 9 percent in the first half the calendar year as Russsia’s invasion of Ukraine, inflation worries, faster policy tightening by central banks and fears of earnings downgrades spooked investors.
The broader markets fared even worse. Under intense selling pressure, the Nifty Midcap 100 index fell 12 percent and the Smallcap 100 plunged 24 percent in the six months to June 30.
The Nifty IT fell the most, by more than 26 percent, as fears of a recession in the US and Europe, the main markets for information technology firms, roiled their stocks.
Realty was the second worst performer, down 20 percent, followed by Metal and Pharma, which fell 14 percent each. Bank, Infra, and Financial Services were also under pressure, losing 5-10 percent.
"The current market scenario has played out broadly in line with our global inflections theme since mid-2021. The ferocity of the market correction since the start of 2022 is characterised by extraordinarily high volatility," said Dhananjay Sinha, Managing Director, Head Strategist and Economist - Equity Research, JM Financial Institutional Securities.
Metals, realty, industrials and capital goods have taken a huge knock, Sinha said.
Yet, four sectors have not only outperformed the Nifty50, but also other sectors by a wide margin, in what is perhaps an indication that the on-ground situation has gradually improved with the markets pricing in negative events to a large extent.
"Absolutely, we have seen a reasonable contraction in valuations...because of interest rates (going up) and inflation movement over the last eight months,” said Anshu Kapoor, Head - Investment Management at Edelweiss Wealth Management.
“However, with coordinated steps taken by global central banks, we could be out of this situation. Markets are forward looking - we should get back to normalised growth in next 2-3 quarters which will reverse the outflows from equity markets globally," Kapoor added.
Auto turned out to be the best-performing sector with a more than 8 percent gain following a correction in metal prices, the key raw material for vehicle makers. Even the supply of semiconductors has been gradually improving, boosting the sector’s prospects.
Energy, Oil & Gas and Fast-Moving Consumer Goods were the other sectors that bucked the trend, rising 8 percent, 2.6 percent, and 1.6 percent, respectively, in the first half.
Stock performance
Around 80 percent of stocks in the Nifty500 delivered negative returns in January-June, pathetic in comparison to the same period last year, when just 10 percent of stocks were in the negative terrain.
Only two multibaggers emerged from the Nifty500 universe --Easy Trip Planners and Mangalore Refinery and Petrochemicals – in the first half.
The first six months of 2021 had produced 37 multibaggers including Rattanindia Enterprises, Tata Teleservices (Maharashtra), Poonawalla Fincorp, Adani Enterprises, Adani Total Gas, Hikal, Happiest Minds Technologies, Adani Transmission, HFCL, Angel One, Intellect Design Arena, JSW Energy, Tata Elxsi, Graphite India and Redington (India).
To be sure, the situation in the first half of 2022 and 2021 – was vastly different.
What lies ahead?
Experts say the the second half of the calendar year is expected to be better than the first half, but investors will keep a close eye on possible earnings downgrades after June and September quarter corporate results, the inflation trajectory, signs of a recession in the US and Europe, and the Russia-Ukraine war.
"Gauging the markets using 10 monitors (including economic surprises, inflation surprises, equity risk premium, credit risk premium, commodity inflation, and treasury term spreads), we see that 30-35 percent of the characteristics of past capitulation are visible as of now, leaving further scope for adjustments," said Sinha of JM Financial Institutional Securities.
He expects commodity prices to correct, and predicts that crude oil would be the last to join them, giving rise to a scenario of market capitulation.
Indian equity markets are simply reacting to global markets and the US Federal Reserve raising rates, which has triggered an exodus of foreign institutional investors, said Suman Banerjee, Chief Investment Officer at Hedonova.
"That being said, inflation is a major concern. Inflation this high leads to the cost of goods rising sharply, which will lead to reduced profit margins. I do think domestic demand is very high and given the right policies, growth will continue," he added.
A bigger worry is a weak that will make imports expensive and fuel inflation, Banerjee said.
Hence, "we are nowhere near the bottom, a lot of liquidity of is yet to be sucked out of the markets once foreign investors exit."
Foreign investors
Foreign investors have taken out more than Rs 3.8 lakh crore by selling Indian equities since October 2021 and over Rs 2.8 lakh crore since the start of this calendar year.
FII money will not return to India unless and until stability returns to the global environment, experts say. Even Indian markets are still trading at higher premium compared to other emerging markets on a long-term average basis.
"With India still trading at a premium to rest of the emerging markets, it will be a difficult case for global asset allocators to allocate new capital to India despite its higher growth," said Abhay Agarwal, founder and fund manager at Piper Serica.
He expects foreign portfolio investment flows to turn positive only after global markets stabilize and crude price corrects to well under $100 a barrel.
"At the same time, we believe that the aggressive selling by FPIs is largely over and we will see a tapering of daily sales figures over the next couple of months."
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