Three charts show trouble for Indian stocks nearing a bear market

While rising inflation and the end of global easy-money policies send Indian equities into a tailspin from their all-time highs, three charts show the pain is unlikely to end any time soon.

The S&P BSE Sensex Index is down more than 15% from its October high, approaching the 20% loss that signals a bear market. The sell-off comes as rising costs and a record decline in the rupee have forced the country’s central bank to join global competitors in raising interest rates.

The value of the Indian stock market has already fallen almost 20% from its peak in January of about $3.7 trillion dollars. The unsupportive economic backdrop, coupled with an unprecedented exodus of foreign investors and earnings estimates that look set to fall, are clouding the prospects for a recovery.

“We expect the markets to continue to correct from here,” said Benaifer Malandkar, chief investment officer at Raay Global Investments Pvt. “It is expected that by the second quarter, the most negative news, the outcome of the Fed’s actions will be priced in.”

Flight for foreigners

Overseas investors have sold Indian stocks at a record pace, withdrawing about $32 billion from the market since September. The withdrawal of foreigners is part of a wave that is also hitting countries like South Korea and Taiwan.

“India is not isolated as it is part of the emerging markets, and it is clear that the emerging markets are out of favor,” said Malandkar of Raay Global. “Until US Fed rates are at their peak, we will see redemptions in emerging markets.”

Chart: Bloomberg

Rosy Estimates

The decline in Indian equities so far has mainly been caused by a fall in valuations. Earnings estimates for the NSE Nifty 50 Index have yet to clock in a meaningful decline as seen in MSCI Inc.’s broadest measure. for Asian equities.

In recent weeks, strategists at Sanford C. Bernstein Ltd., Bank of America Corp. and JPMorgan Chase & Co. expressed concern about the profit optimism that surrounded India. Pending a recovery in valuations, estimated austerity measures are likely to pull stocks further down.

Analysts miss the point on India’s earnings: taking stock

Chart: Bloomberg

Suffering from small caps

Smaller stocks have been hit harder by investor risk aversion, with Indian small- and mid-cap stock indicators already entering bear markets. Market breadth has weakened, with just 16% of the S&P BSE 500 Index stocks trading above their 200-day average level, the lowest level in two years.

Chart: Bloomberg

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