Budget uncertainty triggers sell-off in equities

India’s overheated equity markets are cooling off after a record-shattering rally on the back of budget uncertainty, foreign fund outflow, and a strengthening US dollar.

After touching the historic 50,000 mark, the benchmark Sensex has tanked by 3,300 points (6.6%) since then. Similarly, the broader index NSE Nifty has tanked by 936 points (6.3%) after touching the peak levels. On Thursday, Indian indices fell for the fifth consecutive session. At close, the Sensex was down 535.57 points at 46,874.36 points, a drop of 1.13%. The Nifty was down 150 points or 1.07% at 13,817.50 points.

“On the back of Budget uncertainty, FPI activity and a strengthening US Dollar, we have seen consecutive market drops,” says Anubhav Srivastava of Infinity Alternatives.

In the past four sessions, foreign funds, which were supporting the Indian equity markets since April 2020, have pulled out Rs 6,802 crore from the Indian equities.

Investors seem to recognise stretched valuations and are taking money off the table, experts suggest. As the markets are seeing correction, the investor wealth is down Rs 9.6 lakh crore from its peak levels earlier this month.

On the other hand, the valuation multiples have also come down by 8% from the peak levels, making equities less costly for the investors. As on date, the price to earnings ratio for Sensex companies has come down to 31.96 -- though it’s still on the higher side.

“However, underlying strength of domestic equities continues to remain intact, and any meaningful correction is most likely to be bought out. Notably, 3QFY21 earnings and management commentaries look to be quite impressive, which bode well for the market,” Binod Modi, Head, Strategy at Reliance Securities said.

As Sensex touched the 50,000-mark last week, it had almost doubled in less than 12 months: it had touched a low of 25,880.83 on March 23, 2020. After the bear run in March 2020, as global stimuli got diverted to equity markets, the Sensex saw a rebound and a V-shaped recovery. Since then, foreign funds with net inflows of Rs 1.71 lakh crore have provided support to the markets, spurring the rally in less than a year.

The rally had increased the income gap in India, as rich cornered e gains from the rally, while most of the salaried class was surviving on pay-cuts.