The nifty fell -6.2% in October, the first more than 2% fall in 12 months. And the fall continues into November as we write. As of the 12 November close, the Nifty is down 10%, the first double-digit correction since January – March 2023 (triggered by the SVB bank crisis in California). This is a shock to the buy-the-dip habit (our last newsletter was also called – ‘Buy the Dip market’). Indian markets have been on a high, stoked by strong inflows into domestic mutual funds, and ignoring all warning signs of the last 6 months. And there have been aplenty – a. weakening earnings growth, b. weaker than expected performance by the ruling government in the June ’24 general elections, and c. global stress – including wars, the yen carry trade unwinding, and risks of US recession. Ambit 365, stung a little by taking a bearish view during these phases (in June and August), was positioned very cautiously in Oct. October was a nasty month for us; the NAV was down 3.5%, taking our year-to-date return to 7% (pre-fees and taxes). While our short book did make money – it was not enough to offset the sharp cut in the long book.

So what changed? Three reasons. A. FPIs turned large sellers in October, and combined with a large equity supply, the benign demand-supply equation just turned adverse. B. September quarter earnings seasons threw a lot of negative surprises, with weakening urban demand and sharp earnings cuts. C. China's stock market revival attracts foreign flows, and strengthening USD/ and rising US Bond yields make India less attractive to global investors.

The equity demand-supply equation turns adverse.

Domestic funds continue to attract strong flows- with October seeing record Rs 41,887cr inflows, but this is now much smaller than `Rs60,000cr (in 1 month!) of new equity issuances and FPI selling. With the last 5 weeks of selling, FPIs are now net sellers this year. We last saw this phenomenon from October 22 to June 23, and the Nifty corrected 18% from its peak. Total equity issuances this year have crossed $60bn, +50% yoy, and is more significant than estimated total inflows in equity funds.

 

Chart 1: CY24 YTD, domestic flows as of Sep24 & FPI flows as of Oct 24

Source: Jefferies, Ambit Asset Management

Sharp earnings cuts

With a very disappointing earnings season, the estimated Nifty EPS growth for FY25 is just 5-6%. We started the year with a 15% growth estimate. Analysts are still estimating 11-13% EPS growth for FY26, which we believe is at risk now. This season saw the sharpest earnings cuts since 2020.

 

Chart 2: Nifty 50 consensus earnings trend

Source: Bloomberg, Ambit Asset Management

USD strength

USD and US 10-year yields have strengthened after Donald Trump’s victory in the USA. Trump’s tariff policies are likely to be inflationary, dampening steep rate cut expectations in the USA. This would also impact RBI’s policy stance, and India’s rate cut expectations have also been coming down.

Chart 3: US 10-year bond yield

Source: Investing.co, Ambit Asset Management

Chart 4: US dollar index

Source: Investing.co, Ambit Asset Management

 

Conclusion: Rough ride ahead

FPIs own just under $1tn of Indian equities (17% of the market cap), and even a 10% reduction in this holding could result in an unprecedented wave of selling. The stellar performance of US markets (SPX up 25% year to date, vs. Nifty 11.3%) and the expectation of better performance ahead if Trump follows his tax cut promise can drive home country bias. While Ambit 365 was cautious in October (due to multiple buy-the-dip surprises of the last few months), we are now acting more directionally. Our experience of June and August- a short-lived market response to adverse developments- resulted in that caution. We are positioned with a clear short bias in November, with adequate risk safeguards (stop loss triggers) – and this is working well for us. In the next few months, markets will likely be very volatile with a down bias. And as nasty October notwithstanding, we are prepared to benefit from this environment.