#116 Newsletter

Market Watch

Market Commentary

Are we headed for a market bounce ?

The Indian equity market has been undergoing a long-awaited correction, marking one of the most extended downturns in the past decade. While corrections are a natural part of market cycles, investors now look for signs of a potential rebound. Historical trends, global market movements, and valuation indicators suggest that a bounce could be on the horizon. However, challenges such as rising equity supply and foreign outflows may limit the upside. Here’s a breakdown of what’s driving the current market trend and what investors should watch out for.

Current Market Correction: Second Longest in a Decade

- The Nifty has been in correction mode for 126 days, making it the second longest correction in the last ten years.

- The index has dropped 15% in USD terms, in line with the average past corrections.

- Historically, market corrections in India have bottomed out after a similar magnitude of decline.

I. Global Market Trends Indicate Recovery

- Emerging markets (EM) typically correlate with India’s market movements.

- The MSCI EM Index has already bounced back 5% from its recent bottom.

- This suggests that the Indian market could also recover soon, assuming no unexpected tax shocks in the upcoming Budget and a pro-growth stance from the RBI.

II. Valuations Near Long-Term Averages

- The Nifty currently trades at 18.8x forward PE, slightly above its 10-year average.

- The bond yield vs. equity yield gap is at 145 basis points, in line with historical levels.

- Historically, markets have delivered higher returns over 12 months when purchased at or below this valuation gap.

III. Potential Risks to Market Upside

- The supply of equities has surged in the past six months, exceeding $7 billion per month, which may limit market gains.

- A prolonged phase of low returns could reduce domestic investor inflows into equities.

- FPIs have pulled out $8.2 billion in the last six weeks, contributing to the Nifty’s decline.

IV. Dollar Index and FPI Flows: Key Watch Factors

- The US Dollar Index (DXY) has weakened, which has historically been a leading indicator for EM inflows.

- The Indian Rupee remains relatively strong on a real effective exchange rate (REER) basis.

- A weaker USD scenario (potential under a new Trump presidency or Fed rate cuts) could boost FPI flows into India.

V. Outlook: Short-Term Bounce, Long-Term Caution

- A market rebound is likely before February 7, assuming stable domestic policy and supportive global conditions.

- However, sustained market gains depend on foreign inflows and the ability to absorb increased equity supply.

VI. Investor Takeaway: A tactical opportunity exists for short-term gains, particularly in rate-sensitive sectors. However, long-term investors should watch FPI trends and liquidity conditions closely before making allocation decisions.

Source: Jefferies

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