In light of recent market corrections, we want to provide insights into the factors at play, why volatility is a natural aspect of equity markets, and strategies to navigate the current environment while remaining focused on India’s strong growth potential.
Factors Behind Recent Corrections
Local Influences
Weak Q2 Earnings Across Key Sectors: The second quarter of FY2025 saw weaker performance in sectors like FMCG and automotive, impacting market sentiment. The banking sector is experiencing normalization of non-performing assets, leading to higher provisions, slower deposit growth, and increased costs—factors contributing to slower profit growth. Additionally, prolonged monsoon and lower government spending in the industrial and utilities sectors have affected earnings. However, we expect these to be temporary dips, with a recovery anticipated in the coming months.
High Valuations in Mid and Small-Cap Segments: Elevated valuations, particularly in mid and small-cap companies, suggest that a focus on large-cap allocations and diversified investments across asset classes may be more beneficial in the current landscape.
External Supply Factors
Foreign Institutional Outflows Due to Attractive Valuations in Other Markets: China’s recent economic stimulus, alongside Japan and other emerging markets’ appeal, has drawn foreign institutional investors (FIIs) away from India. FII holdings are now near historical lows, after offloading nearly Rs. 1,00,000 crores in October and Rs. 2,27,000 crores this year. We view this as a short-term trend, with India’s growth narrative remaining compelling in the long term.
Global Factors
US Election-Driven Global Volatility: While upcoming US elections may heighten global volatility, we expect minimal long-term impact on Indian markets.
Geopolitical Tensions in the Middle East: Recent instability in the Middle East may cause short-term fluctuations in oil prices, with limited and temporary effects on the Indian economy.
Technical Factors
Market Indicators Suggesting Correction: The Nifty 50 index’s Relative Strength Index (RSI) recently reached high levels, paired with technical patterns that suggest a correction.
Corrections and volatility are an integral part of equity markets:
Only 4 out of the last 44 CY, had intra-year declines less than 10%
Despite the markets having intra-year declines every year, 35 out of 44 years ended with positive return.
The two graphs highlight that markets typically undergo 10–15% corrections annually, yet often closing the year with positive returns. This highlights the value of staying invested despite short-term fluctuations, as markets tend to recover and reward patience over time.
Path Forward: India’s Resilient Growth Story
Though markets are currently volatile, India’s long-term growth trajectory remains strong:
Economic Resilience: India’s GDP growth continues to surpass historical averages, with recent inflation control measures positioning the economy for sustained expansion.
Robust Liquidity: With mutual fund inflows reaching historic highs of Rs. 25,000 crores per month, liquidity remains strong, underscoring investors’ faith in India’s growth story.
Positive Outlook from Global Institutions: The IMF projects a 7% growth rate for India, signaling that the country’s long-term growth story remains robust.
Strategies for Navigating Market Volatility
Large-Cap and Diversified Allocations: With mid- and small-cap segments appearing overvalued, focusing on large-cap stocks, including flexicaps with a large-cap tilt and multi-asset mutual funds, may offer more stability and resilience.
Systematic Investment Options: Consider using Systematic Investment Plans (SIPs) and Systematic Transfer Plans (STPs) to manage volatility effectively, allowing for cost averaging over time.
Staying Invested for Long-Term Gains: By remaining invested, you position yourself to benefit from India’s promising growth trajectory, as markets tend to reward patience over the long term.
We appreciate the trust you place in us to help guide your investments, and we’re here to answer any questions or discuss tailored strategies that best fit your goals.
