The ongoing sell-off in Indian equities is primarily technical in nature reflecting multiple compression rather than any drastic macro issues, according to Jefferies’ latest GREED & fear report.
It noted that a major driver of the sell-off has been aggressive foreign selling. The report pointed out that foreigners have sold a net $12.2 billion worth of Indian stocks so far this year, after selling a net $12.3 billion only in the fourth quarter of 2024. But as foreigners sell, domestic flows into equity mutual funds have so far held up to a remarkable extent.
“For now there is confidence amongst mutual fund companies that these flows will continue since most are based on monthly instalment SIP schemes,” it said, adding that the risk of outflows will grow when small to mid-cap funds start to show a YoY (year-on-year) loss which it expects in about three months.
Meanwhile, it may require mid-cap valuations to converge with blue chips to bolster confidence that the correction is done, most particularly in a world where US stocks are under pressure, the report said.
GREED & fear’s India portfolio, which is heavily positioned in more high beta domestic cyclical sectors, such as property, infrastructure and industrials, outperformed the Nifty by 18.7% in US dollar terms on a total-return basis in the year to 17 December but has since underperformed by 12.1%, the report said.
Quarterly results have also been broadly in line in the latest earnings season, the report said. “Out of the India universe of 183 companies for which the December 2024 quarter results were analysed, the ratio of upgrades/downgrades stands at 39%/53%, reflecting an improvement compared with 31%/62% in the previous quarter.”
The report noted that domestic fund managers rationalized the retreat from domestic cyclicals to rotate into more consumption-related plays on the view that the Modi government in its third term has turned more “populist”. In GREED & fear’s view, it is premature to give up entirely on a private sector capex cycle, which is the current mood of the moment. “Corporate balance sheets remain underleveraged, and banks are willing and able to lend,” it said.
India, of late, has been following a US-style path where companies have enjoyed a windfall in recent years relative to labour in terms of the share taken by profits rather than wages,
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