The month of September has historically seen negative returns for the S&P 500, and this seasonality is believed to affect the performance of global stock markets. In India, increased volatility has been observed, with mid- and small-cap stocks being the most affected while large-cap stocks remain relatively stable.
The volatility in Indian markets has led to increased selling pressure from foreign institutional investors (FIIs) and high-net-worth individuals (HNIs). This selling by foreign investors is a result of the adverse performance of global equities, which impact emerging markets like India.
The global market as a whole is facing challenges related to a sluggish economy, high inflation, and sustained high-interest rates. These factors dampen corporate and household spending, posing significant obstacles to future growth. Additionally, elevated bond yields, caused by these challenges, have an unfavorable impact on equities, reducing their forward valuation.
Emerging markets, including India, have witnessed substantial selling due to these global challenges. However, the level of selling by FIIs in India has been relatively moderate. This is because there is a belief that the domestic economy is poised to decouple from global trends, driven by industrialization and favorable business policies. The impact of FIIs’ selling activity is also cushioned by positive inflows from domestic institutional investors (DIIs) and retail investors.
In September, there was also selling activity noticed among HNIs, particularly in mid- and small-cap stocks. This may be a result of profit booking after a solid performance in the previous months. Despite short-term constraints, the medium to long-term trend for mid- and small-cap stocks is expected to be maintained. This is supported by domestic earnings growth, which is forecasted to have a stronger effect compared to large caps. Furthermore, the valuations of these stocks are not at bubble levels.
Concerns have been raised about the influence of the implementation of Additional Surveillance Mechanism (ASM) on small and medium-sized enterprises (SMEs) stocks. SMEs face greater challenges compared to larger establishments and are generally riskier in nature. The exact impact of ASM on small-cap stocks is speculative at this stage.
It is worth noting that the performance of SMEs has been driven by speculation surrounding small-sized initial public offerings (IPOs). However, mutual funds tend to avoid investing in the SME segment. The recent influx of funds into small-cap mutual fund schemes is likely due to the discounts in valuation and performance when compared to large and mid-caps.
Overall, while Indian markets are experiencing increased volatility amidst global economic challenges, there are indications that the domestic economy may decouple from global trends. The medium to long-term trend for mid- and small-cap stocks is expected to be maintained, supported by domestic earnings growth and favorable valuations.
– S&P 500: A stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.
– FIIs: Foreign institutional investors are entities that invest in the financial markets of a country different from their own.
– HNIs: High-net-worth individuals are individuals with a high level of wealth.
– ASM: Additional Surveillance Mechanism is a measure implemented by stock exchanges to monitor price movements and trading volumes of stocks. It aims to prevent excessive speculation and market manipulation.
– SMEs: Small and medium-sized enterprises are businesses with a capital size of less than ₹25 crores.
– IPO: Initial public offering is the process by which a private company offers shares to the public for the first time.
– Source article: [Please provide source]
– S&P 500: https://www.investopedia.com/terms/s/sp500.asp
– ASM: https://www.investopedia.com/terms/a/additional-surveillance-mechanism.asp