Nifty’s Slide May Continue as Weak Earnings and Global Risks Weigh on Markets, Warns Nuvama

Brokerage Cuts IT Sector to ‘Underweight’, Raises Exposure to Consumer Stocks

Indian equity markets continue to face significant pressure as Nuvama Institutional Equities has issued a warning that the Nifty 50’s downturn may persist. The brokerage cited weak earnings, high valuations, and rising global uncertainties as key reasons behind the market’s ongoing correction.

The benchmark Nifty 50 index has already fallen by 15% from its recent peak, driven by weak corporate earnings and sustained foreign institutional investor (FII) selling. With no immediate catalysts for a rebound, analysts at Nuvama believe the market’s recovery will largely depend on either strong earnings growth or supportive policy interventions.

Weak Earnings and Valuation Concerns Weigh on Markets

According to Nuvama, the ongoing correction is primarily due to India’s weak earnings growth, which has failed to keep pace with high stock valuations. Additionally, global macroeconomic risks—including concerns over a U.S. recession, high interest rates, and geopolitical tensions—have further dampened sentiment.

• Corporate earnings outlook remains muted due to:
  • Shrinking profit margins
  • Weak consumer demand
  • Global trade uncertainties
• FIIs have been aggressively selling Indian equities, exacerbating the market’s correction.
• Valuation premium to emerging markets (EMs) has now reverted to its 10-year average, suggesting that the recent India-specific de-rating may be complete.

“Just as India’s isolated cyclical melt-up in FY24, H1FY25 was a break from the past. The ongoing correction is driven by earnings reconciling with weak top-line growth and aligning with EM peers. High valuation only worsened the situation, leading to heavy FII outflows, which, in turn, has weakened India’s balance of payments and macro liquidity,” Nuvama noted in its report.

Nuvama Adopts Defensive Stance, Downgrades IT Sector

Given the prevailing macroeconomic conditions, Nuvama has turned defensive on Indian equities, making significant shifts in its sectoral allocations:

• IT sector cut to ‘Underweight’ from ‘Neutral’, citing risks from:
  • Slowing global IT spending
  • Rising protectionist trade policies in the U.S.
  • High employee costs impacting margins
• Increased exposure to consumer stocks, which are seen as more resilient during economic downturns.
• Overweight recommendations on:
  • Consumer
  • Private banks
  • Insurance
  • Telecom
  • Pharmaceuticals
  • Cement and chemicals
• Underweight on:
  • Industrials
  • Metals
  • Power
  • IT
  • Automobiles
  • Public sector undertakings (PSUs)

Small- and Mid-Cap Stocks Remain Overvalued, Vulnerable to Further Declines

Despite the broader market downturn, small- and mid-cap stocks remain expensive, making them particularly vulnerable to further corrections. According to data from LSEG, small-cap and mid-cap indices have already declined by 24% and 20.5%, respectively, but valuations continue to be a concern.

• Nuvama expects continued downside risk in these segments unless earnings improve or valuations correct further.
• High valuations in small and mid-caps suggest they may still be overpriced compared to their earnings potential.

Foreign Institutional Investors (FIIs) Continue to Exit Indian Equities

A key driver behind the market correction has been persistent FII outflows, which have put additional pressure on the rupee and weakened India’s macroeconomic liquidity position.

• FIIs have been reducing exposure to Indian equities due to:
  • Better opportunities in developed markets
  • Concerns over slowing corporate earnings growth
  • Geopolitical and policy uncertainties impacting Indian stocks
• The exodus of foreign investors has intensified, contributing to market volatility and liquidity constraints.

Market Recovery Hinges on Earnings Growth or Policy Support

While valuations have now realigned with historical averages, Nuvama warns that a sustainable market recovery will require either a significant improvement in earnings growth or policy support from the government and the Reserve Bank of India (RBI).

• Corporate earnings growth remains the biggest uncertainty, with analysts closely watching Q4 FY24 and Q1 FY25 results for signs of a turnaround.
• Government stimulus measures or regulatory interventions could provide short-term relief to markets, especially in sectors like infrastructure and banking.

Nuvama’s cautious stance reflects broader concerns that the Indian market may struggle in the near term unless earnings surprises positively or external conditions improve.