The recent market downturn stands as one of the most significant in recent years, with the Nifty index declining over 10% from its peak and 15 out of 18 sectoral indices experiencing similar drops. Notably, the Nifty has dipped below its 200-day moving average, a key technical indicator. This correction stems from a combination of factors rather than a single cause. We view this as an organic technical correction, anticipating a rebound in the near future. However, given the prevailing global uncertainties, it is prudent to maintain a cautious approach.

Understanding the Indian Stock Market Correction

The recent correction in the Indian markets is driven by a confluence of global and domestic factors rather than a single catalyst. Starting with stretched valuations, the market has faced multiple pressures, from economic uncertainties worldwide to a mix of homegrown challenges.

The equity AUM of domestic MFs fell by 3.6% MoM due to declines in the Nifty, while mutual fund inflows through SIPs hit an all-time high at INR253.2b, up 3.3% MoM and 49.6% YoY.

Sectoral Impacts

Several sectors have experienced notable declines from their 52-week highs:

• Oil & Gas and Energy: Both sectors have declined by over 21%.

• Realty and Auto: Each has experienced a decline of approximately 17%.

• Telecommunication, Services, and Power: These sectors have seen declines exceeding 16%.

Key Factors Contributing to the Indian Stock Market Correction

1. Global Economic Uncertainties

• Geopolitical Tensions: The re-election of Donald Trump in the U.S. has renewed concerns over protectionist policies , raising questions around global trade stability.

• Commodity Price Volatility: Fluctuations in commodity prices, especially in energy, have put additional pressure on sectors like Oil & Gas, further exacerbating the correction.

• Dollar Strength: The Dollar Index rose to its highest since April, putting pressure on the EUR/USD, which fell to a multi-week low. This could put further downward pressure on the Indian rupee, as a strong dollar typically leads to outflows from emerging markets. A depreciating rupee could increase the cost of imports (notably oil), thereby adding inflationary pressures to India.

• Treasury Yields: Short-term Treasury yields dropped after CPI data which is positive. But the 10-year yield increased to 4.46%, influenced by expectations of inflationary policies under Trump. Higher long-term U.S. yields tend to make U.S. bonds more attractive, which could lead to some capital outflow from Indian assets, especially if investors expect more inflationary policies in the U.S.

2. Domestic Economic Challenges

• Rising Inflation & Liquidity Concerns: The Reserve Bank of India’s tightening of monetary policy in response to inflation has increased borrowing costs, impacting both consumer spending and corporate investment. October WPI is expected to rise to 2.4%, driven by increased food and commodity prices amidst rupee depreciation. Reserve money data showed a YoY growth slowdown to 6.6% due to FX outflows, signaling potential liquidity concerns.

• Softening Demand: Weak urban demand has impacted consumer-driven sectors such as FMCG and Consumer Durables, adding to the headwinds faced by the market.

3. Sector-Specific Issues

• Rising Input Costs: Key sectors like Auto and FMCG are grappling with rising input costs, compressing margins and reducing profitability.

• Regulatory Adjustments: Certain industries face new regulations, potentially impacting both their profitability and growth trajectories.

• Public Sector Investments: Investment by Central Public Sector Enterprises (CPSEs) dropped by 8% YoY in April-October FY25, largely due to a slowdown in investments from railways and the National Highways Authority of India.

4. Corporate Earnings Performance

The recent slowdown in corporate earnings growth has been notable. During the July-September period, net sales growth was only 7% year-on-year, marking the slowest pace in 5 quarters. This performance lag has weighed heavily on market sentiment, making the correction feel more pronounced.

5. Technical Indicators

The Nifty 50 index has tested its 200-day moving average (DMA) for the first time in 20 months, a significant technical level that often acts as a psychological support for investors. Breaching this line may indicate shifts in sentiment, making investors more cautious.

6. Regulatory Changes in Weekly Options:

NSE is discontinuing weekly contracts on the Nifty Bank Index, marking the end of India's first widely traded weekly derivative. This move comes as part of SEBI’s regulatory efforts to curb excessive speculation in equity derivatives, which have grown more than 40 times in the past 5 years. At its peak in February, options trading volumes reached $6 trillion in notional value, surpassing the size of India’s economy. The Nifty Bank weekly options represented about one-third of index options volumes and were heavily used for event-based hedging by traders. The regulator’s measures aim to address growing retail losses, with 93% of retail traders reportedly losing money in derivatives during recent years .

The phasing out of Bank Nifty weekly options by 20th November under new SEBI regulations, leaving only Nifty 50 weekly expiries, is creating short-term volatility in stocks as traders are adjusting their positions. This could contribute to fluctuations in the financial sector, which is already sensitive to FII activity and currency movements.

7. RBI’s Stance on Rate Cuts

While central banks globally are cutting rates, the RBI has maintained its stance due to rising inflation, particularly in food prices, driven by poor monsoon and supply chain disruptions. The lack of rate cuts in India reduces the appeal of Indian equities compared to markets with looser monetary policies, particularly as growth projections soften.

8. India’s Trade Deficit Widens Amid Festive Season Spending

India's trade deficit rose significantly in October, reaching $27.1 billion compared to $20.78 billion in September. Imports surged 3.9% year-over-year to $66.3 billion, driven by higher demand during the festive season, while exports grew robustly by 17.3% to $39.2 billion.

Gold imports increased to $7.13 billion in October, up from $4.39 billion in September, fueled by demand during Diwali. Crude oil imports also climbed to $18.2 billion from $12.5 billion in the prior month. The widening trade gap could pressure the rupee, which hit an all-time low of 84.40 against the US dollar. However, global trade faces challenges from geopolitical tensions and potential tariffs under a Trump administration .

Post-Election Rally Stalls US Markets Amid Fed’s Cautious Rate Outlook

The initial euphoria surrounding Trump winning US presidential elections 2024 and his business-friendly policies, such as tax cuts and deregulation, is giving way to a more measured outlook as investors weigh fiscal policies' potential inflationary impact. Key market movements:

• S&P 500 dropped 2% over the week, erasing half of its gains since the election.

• Russell 2000 declined 4%, marking its worst week in over two months.

• Nasdaq 100 fell ahead of next week’s critical earnings report from Nvidia, dropping over 2% on Friday alone.

• RPAR Risk Parity ETF, which tracks multiple asset classes, tumbled 3.2%, the largest drop since October 2023.

Despite the week’s selloff, big money managers continue to increase their U.S. equity holdings, now at an 11-year high, according to Bank of America. Day traders also accelerated share purchases, hitting the fastest pace since March 2022.

Drivers Behind the US Decline This Week

1. Fed's Go-Slow Approach: Powell noted that the U.S. economy remains “remarkably good,” indicating that the Fed will lower rates cautiously, slowing the anticipated easing cycle. Traders revised their expectations for a December rate cut, leading to higher 10-year Treasury yields, which hit a four-month high.

2. Inflation Concerns: Strong economic data on retail sales and persistent inflation risks have kept bond yields elevated, pressuring equities as rising rates compete with stocks for investor interest.

3. Valuation Challenges: Elevated valuations in both equities and bonds leave little room for error. A Bloomberg model shows cross-asset valuations are now higher than 88% of the time since 1962, highlighting vulnerability to growth disappointments or inflation shocks.

Globally Gold Price Hits A 2 Month Low

Global gold prices are nearing a 2 month low, set for their worst weekly performance in over 2 years with a 4% weekly loss, as expectations for a December Federal Reserve rate cut fade. This marks a sharp turnaround for the precious metal, which has dropped 8% from its record high on October 31. Despite recent losses, gold remains up 24% year-to-date, supported by:

• The Federal Reserve’s earlier easing cycle.

• Central bank gold purchases.

• Periodic surges in haven demand driven by global economic and geopolitical uncertainties.

Key Factors Driving the Decline In Gold Prices

1. Fed Policy Expectations: Traders scaled back hopes for a near-term rate cut after Fed Chair Jerome Powell emphasized the economy's “remarkably good” performance. Higher bond yields, which move inversely to gold prices, have surged.

2. Strong Dollar: The US Dollar Index rose to a two-year high amid optimism about Donald Trump’s election victory driving economic growth and corporate profits. A stronger dollar makes gold more expensive for buyers using other currencies.

3. Haven Demand Eases: With lower geopolitical and economic risks and higher borrowing costs, demand for gold has weakened.

Moody's Projects 7.2% Growth for Indian Economy in 2024

Moody’s Ratings forecasts a robust 7.2% growth for India’s economy in 2024, driven by a rebound in household consumption and moderating inflation. The agency highlights India’s “sweet spot” in its latest Global Macro Outlook Report for 2025-26, projecting growth rates of 6.6% in 2025 and 6.5% in 2026.

Key Growth Drivers for Indian Economy

Moody’s anticipates that RBI will maintain a relatively tight monetary policy in 2024 to manage inflation risks stemming from geopolitical tensions and extreme weather events.

1. Household Consumption: Festival season demand, luxury consumption , increased rural spending, supported by favorable monsoon conditions, are expected to drive consumption.

2. Inflation Moderation: Despite intermittent food price volatility, inflation is expected to ease toward the RBI’s target levels as food prices stabilize.

Global Growth Expectations

• G-20 Economies: Expected to grow at 2.8% in 2024, down from 3.0% in 2023, with growth moderating through 2026.

• US Economy: Outperforming other developed nations but likely to see slower growth ahead.

• Europe: Sluggish recovery expected to gradually strengthen.

• China: Growth projected to decelerate further despite Chinese government stimulus measures .

Wright PMS Strategy and Outlook

• Investment Approach During Correction: We are adopting a cautious and defensive stocks investment strategy , focusing on sectors with solid fundamentals and stable growth potential. This includes increasing exposure to sectors that have demonstrated resilience, such as Banking, Pharmaceuticals, and select Digital companies.

• Near-Term Caution: We remain vigilant regarding ongoing market volatility and risks, including rising bond yields and continued foreign institutional investor (FII) outflows. Our strategy involves careful monitoring and selective investment to mitigate these risks.

• Long-Term Strategy: We view the current correction as an opportunity for selective accumulation, particularly in sectors poised for long-term growth. Our focus remains on identifying and investing in companies with strong fundamentals and sustainable growth trajectories.

Looking Ahead

While the recent market correction may seem unsettling, it actually presents a valuable opportunity for strategic investment. Historically, short-term corrections are often just that—short-lived. They can provide ideal entry points for long-term investors looking to top up their portfolios at more attractive valuations.

For our investors, we view this as a chance to reinforce positions in sectors with strong fundamentals and growth potential. Corrections allow us to recalibrate, carefully selecting high-quality stocks that are now trading at more reasonable prices.

Our portfolio management strategy remains grounded in prudent, research-driven decisions, focused on navigating current volatility with resilience. We encourage investors to maintain a long-term perspective and remain patient. This correction phase, while challenging, is a natural part of market cycles and, with the right approach, can set the stage for future gains.