Middle of the pack: India’s market performance slips post-Trump

Over the past five trading sessions since November 5, India’s benchmark indices have fallen around two percent each even as global indices like the S&P 500 and Dow Jones Index rose by around five percent

Following the recent US Presidential elections that saw the return of Donald Trump, some developed markets, led by the US, China, and Japan, have surged significantly, while emerging markets like Korea and the Philippines have seen sharp declines in dollar terms. India sits in the middle, almost flat since November 5.

Analysts attribute this to the high valuations of the Indian stock markets, significant selling by foreign investors, and economic challenges, including sticky inflation, high interest rates, and a weakening rupee.

Over the past five trading sessions since November 5, India’s benchmark indices -- Nifty 50 and Sensex – have fallen around two percent each even as global indices like the S&P 500 and Dow Jones Index rose by around five percent each in the same period. The same period saw leading Asian indices like Hang Seng and Kospi fall 5.5 percent and 7 percent, respectively.

The fall in the Indian market, as per experts, was primarily due to lower domestic corporate earnings. India Inc saw net profit growth of 3.6 percent during the September quarter, which was the slowest growth in 17 quarters, driven by sluggish revenue growth and rising interest and depreciation costs. Total expenses and other income also edged up only slightly.

This, among other factors, has also led to foreign institutional investors (FIIs) selling Indian shares in record volumes and redirecting capital at other markets including China and Hong Kong. In India, FIIs have been net sellers at nearly $13.7 billion in October and November till date, as per data from NSDL.

Incidentally, the recent selling has come on the back of net buying to the tune of nearly $6.9 billion in the month of September.

Market experts are of the view that while FIIs have been hesitant due to high valuations, many are waiting for further correction to buy stocks at attractive valuations. While the benchmarks have already lost close to 10 percent from the all-time highs, FIIs anticipate another correction of 3-4 percent, they say.

Although current valuations seem slightly expensive (PE of 21-22 times), they are not far from the five-year average of 19.5. A modest correction could make Indian stocks more attractive for FIIs again, feel most experts. Incidentally, the benchmark Sensex has already lost close to 8,400 points from its all-time high of 85,978.25 touched on September 27.

The fall in the broader indices, however, has been marginally higher than that of the benchmarks. For instance, the BSE MidCap index has shed nearly 11 percent since touching an all-time high in September.

This assumes significance in the current scheme of things, as experts believe that the small-cap and mid-cap sector in the US could attract a lot of attention – and, more importantly, fund flows – in the near future.

Hitesh Jain, Strategist -- Institutional Equities Research, YES Securities believes that in the US, the focus is shifting from large-cap, tech-driven stocks to small-cap stocks.

“Over the past few years, large-cap companies, especially in the technology sector, have outperformed, while small-cap stocks have struggled. The main reason for this underperformance of small-cap stocks is their vulnerability to higher interest rates. Small-cap companies typically carry more debt and are more sensitive to rising borrowing costs, unlike large-cap tech companies, which tend to be cash-rich and debt-light,” says Jain.

“However, a change in the economic environment, with interest rates moving lower, this reduction in rates, along with potential policy shifts toward domestic manufacturing, is (being) seen as a positive development for small-cap companies, which could now benefit from these factors,” adds Jain while highlighting that US equities, particularly small-cap stocks should perform.

Meanwhile, the Indian rupee also hit another lifetime low of 84.40 against the US dollar on Thursday, continuing its decline amid a strong post-election rally in the dollar and rising US interest rates.

The dollar index has surged to a year-high of 106.64, up nearly 3 percent since Trump’s election, driven by expectations of tariffs and tax cuts, while the US 10-year Treasury yield reached a 3.5-month high of 4.48 percent. However, despite the rupee’s steady decline, it has fallen less than other Asian currencies, aided by the Reserve Bank of India’s efforts to curb excessive volatility.

Experts further highlight that the US election results have the potential for major shifts in economic and geopolitical landscapes and the financial markets reaction may be mixed though tariffs could bring short-term inflation. Emerging markets may see some volatility but could attract investors seeking resilience in a changing trade environment, they add.