The Indian stock market faced a significant decline on August 2, reflecting a broader global sell-off. Weak global cues, valuation concerns, geopolitical tensions, unimpressive Q1 results, and an overbought market led to this downturn.
Weak Global Cues
Global sentiment turned negative as major markets in the US and Asia fell due to concerns over slowing economic growth. Weaker-than-expected US factory data exacerbated fears. According to Reuters, the Institute for Supply Management’s (ISM) manufacturing PMI dropped to 46.8, the lowest since November, from 48.5 in June. A PMI below 50 indicates a contraction in the manufacturing sector. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, noted that the drop in the ISM Manufacturing index spooked markets, reviving recession fears in the US.
Prashanth Tapse, Senior VP (Research) at Mehta Equities, observed that despite recent market rallies, the news of a potential US recession triggered a 1-2% correction, evident in today’s market performance.
Valuation Concerns
Valuation concerns have been mounting, with experts pointing out that the market appears ripe for a correction. Trendlyne’s data shows the current PE (price-to-earnings ratio) of Nifty 50 at 23.5, above its two-year average of 22, and the current PB (price-to-book value) at 4.22, slightly above its two-year average of 4.09. Vijayakumar mentioned that the market lacks fundamental support on the valuation front, with Nifty 50 expected to see earnings growth of around 15% this year.
Geopolitical Tensions
Geopolitical tensions also weighed on market sentiment. Recent claims by Israel about the deaths of key Hamas figures heightened concerns. Vijayakumar expressed fears of worsening tensions in West Asia, potentially leading to regional conflict and impacting various asset classes, including crude oil and gold.
Tapse echoed these sentiments, noting that rising tensions in West Asia are significant triggers affecting multiple asset classes.
Unimpressive Q1 Results
Mixed June quarter results from India Inc. have raised concerns about sustaining current valuation levels. Nikhil Ranka, CIO-Equity Alternatives at Nuvama Asset Management, noted that Q1 earnings have been neutral, with no major upgrades or downgrades to FY25/FY26 earnings estimates. IT sectors have seen recovery signs, while banking faced minor downgrades due to NIM pressure. Vinod Nair, Head of Research at Geojit Financial Services, described Q1FY25 earnings as lackluster, with broader market valuations remaining high.
Overbought Market
The Indian stock market, frequently hitting record highs, was seen as overbought. It took just 24 sessions to climb from 24,000 to 25,000 points. Weak global cues and rising West Asia tensions acted as triggers for correction. Jatin Gedia, Technical Research Analyst at Sharekhan by BNP Paribas, noted that the Nifty 50 closed below its level from the last four trading sessions, failing to maintain upward momentum.
Market Performance
On August 2, the Sensex fell 885.6 points (1.08%) to 80,981.95, while the Nifty dropped 284 points (1.14%) to 24,726.9. Declines in IT and auto stocks led this downturn, following weaker-than-expected US data. Top gainers on the NSE included Divi’s Lab, HDFC Bank, Dr. Reddy’s Lab, Sun Pharma, and Britannia, while major losers were Eicher Motors, Tata Motors, Maruti, JSW Steel, and Hindalco.
Srikanth Chauhan of Kotak Securities noted that Friday’s correction wiped out weekly gains, although BSE Midcap and Smallcap indices performed better. He highlighted positive domestic indicators like a 58.1 Manufacturing PMI and 10% GST growth, amid global market reactions to central bank meetings and FPI outflows. Vinod Nair from Geojit emphasized the broad sell-off due to high valuations and weak Q1FY25 earnings, despite potential US Fed rate cuts.
