Stocks plunge on US bond yields surge, escalating Israel conflict
MUMBAI : Indian stocks plunged on concerns over the impact of rising US bond yields, the widening Israel-Hamas conflict, and the pressure on profitability posed by potentially higher crude oil prices. The decline was fuelled by widespread selling by retail and affluent investors across small- and mid-cap stocks, which had previously outperformed their large-cap counterparts.
The Nifty and Sensex fell by more than a percent each, breaching key supports, while the Nifty Midcap 150 and the Nifty Smallcap 250 indices slumped 2.7% and 3.79% each. The fall was due to direct retail investor selling, which led to overall investor wealth falling by ₹7.47 trillion from Friday’s total market capitalization to ₹308.99 trillion on Monday.
The decline happened despite foreign portfolio investors (FPIs) purchasing a provisional ₹252.25 crore and domestic institutional investors buying ₹1,111.84 crore worth of shares. Market experts attributed the decline to high net-worth individuals (HNIs) and retail investors selling off. The carnage in mid-cap and small-cap stocks led to these indices underperforming the benchmark Nifty and Sensex from their September record highs.
While the Nifty and Sensex corrected by 4.6% and 4.9% each from their mid–September record highs of 20,222.45 and 67,927.23, Monday’s fall alone caused the Nifty Midcap 150 to have underperformed, with the index falling 6.8% from its 12 September record of 15,599.05. The correction in small caps resulted in the Nifty Smallcap 250 plummeting by 5.24% from its 18 October record high of 12,590.45.
The Nifty’s fall by 260.90 points to 19,281.75 was the most in eight months, while the Sensex’s 825.74 point fall was the most in three months.
The selling worsened in the last half hour of trade, with the US bond yield rising the most in 17 years to a tad above 5%. The rising yield in the US has resulted in FPIs repatriating funds from Indian shares to the safety of the dollar, causing the Indian markets to correct significantly from record highs just a month ago.
The US Federal Reserve raised the benchmark Fed Funds Rate from near-zero in March last year to 5.25% recently to tame rising inflation. This has raised the cost of funds in the US, reflected by the 10-year US treasury yield rising from 4.24% a year ago to as much as 5% on Monday.
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The Nifty earnings yield, which is the inverse of the price-to-earnings ratio, has risen from 4.21% to 4.44% over the same period, drastically reducing the attractiveness of riskier Indian equities for foreign investors even though early bird earnings in the September quarter grew by almost 22% from a year ago.
“The compression of the spread between the earnings yield and bond yields has resulted in FPI outflows. This has resulted in near-term volatility,” said A. Balasubramanian, chief executive of Aditya Birla SunLife Asset Management Co. “However, I remain optimistic about the mid- to long-term prospects of the Indian markets, which have outperformed their global peers and are visible in strong earnings posted by companies thus far. We must not forget that domestic inflows remain strong based on expectations of strong earnings growth prospects of corporate India.”
FPIs have sold ₹25,113 crore in the past two months through 23 October after buying shares worth ₹1.69 trillion in the preceding six months. Their total purchases this fiscal year (April-20 October) stand at ₹1.36 trillion. Domestic institutions have purchased shares worth ₹63,210 crore so far this fiscal.
Another concern for markets is the widening of the Israel conflict. So far, the war has been contained to the Gaza Strip, but fears of it enveloping Iran, Lebanon or Syria could impact crude prices. Since the start of the war, Brent crude has risen almost 8% to $95.04 a barrel and could breach the $100 mark if the war widens.
“There is a barrage of bad news, and one should remain cautious and follow asset allocation discipline,” said Nilesh Shah, group president and managing director of Kotak Mahindra Asset Management. “Crude oil breaching the three-digit mark amid rising geopolitical tensions, FPI outflows and rising US bond yields have queered the pitch in the near term for the markets. The fear is particularly palpable in some small- and micro-cap stocks that have seen huge fund flows in recent months.”
Top mid-cap losers included Supreme Industries, Bank of India and Laurus Labs, which fell 8.3-10%. Small-cap losers that fell the sharpest included SJVN, BEML and Rashtriya Chemicals and Fertilizers Ltd, which fell between 9% and 12%.
Small caps and mid caps could continue underperforming as long as the turbulence persists.
“Mid caps and small caps are expensive, and any macro development like rising bond yields in the US could make the markets nervous,” said Gautam Duggad, head of research-institutional equities at Motilal Oswal Financial Services.
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Updated: 24 Oct 2023, 12:11 AM IST
