Indian Stocks Likely To Revive Soon After Second-Longest Rout In A Decade

Indian stocks is likely to see a bounce-back soon after witnessing the second longest of the 10 corrections in the last decade if the Reserve Bank of India takes a pro-growth stance along with no tax surprise in the upcoming Budget, according to Jefferies.

The benchmark Nifty should bottom out before Feb. 07 assuming no tax surprise in the Budget and a pro-growth RBI, analysts at the brokerage firm said. Rate sensitives stocks should do well in the expected near-term rally, it said. However, the 12-month outlook depends on FPI flows.

Sensex and Nifty are set for their fourth straight month of losses in January, the longest losing streak in 23 years. Nifty Midcap and Smallcap indices are on course to record the biggest monthly fall since March 2020. The Nifty Next 50—the next rung of liquid securities after the Nifty 50—trades over 20% below its peak last September.  

The market has corrected 10 times in the past 10 years with an average fall of 18% before bottoming out, Jefferies said. "Ex-covid, the highest correction has been 22% and the lowest being of 11%."

India's corrections have been emerging market correlated with the index already up 5% from the bottom, Jefferies noted. In the past decade, nine times out of 10, Nifty corrected alongside the EM Index, suggesting high global linkages.

Valuation indicators are at a 10-year average level now with the Nifty currently trading at 18.8 times one-year forward price to earnings, about 3-4% above its 10-year average.

An increase in equity supply limiting market returns is the risk beyond the expected near-term market bounce, Jefferies said. Once the market bounces from the lows, equity supply should increase again, capping the returns.