Stock market today: 5 reasons why stock market is falling ahead of Lok Sabha election

The Indian stock market has been experiencing strong bouts of volatility in recent sessions, leaving investors perplexed. The India VIX index, which measures volatility in the Indian stock market, has surged nearly 35 per cent in May so far, following a meagre 0.30 per cent rise in April and a significant 18 per cent fall in March.

The Sensex opened at 73,225 on Wednesday, May 8, against its previous close of 73,511.85 and soon fell about half a per cent to 73,149. The Nifty 50 also fell about half a per cent to 22,186 after opening at 22,231.20 against its previous close of 22,302.50.

However, the mid and small-cap segments saw some buying interest as the BSE Midcap and the BSE Smallcap indices rose up to half a per cent in the morning session on Wednesday.

Around 9:40 am, the Sensex was trading 0.32 per cent lower at 73,273.85 while the Nifty 50 was 0.29 per cent down at 22,238.

The India VIX rose over 2 per cent to 17.4 level.

Also Read: Stock market today: Nifty 50 falls for 3rd session in a row; investors lose nearly ₹5 lakh crore in a day

What’s causing the tremors in the Indian stock market?

Experts believe there are five crucial reasons behind the volatility in the Indian stock market.

FIIs selling

According to experts, the biggest reason behind the recent volatility in the Indian stock market is the strong selloff by foreign institutional investors (FIIs).

In just three trading sessions in May, FIIs have sold off Indian equities worth ₹982 crore, according to NSDL data.

“FIIs have been continuously selling, which has caused nervousness among domestic retail investors,” said G. Chokkalingam, Founder and Head of Research at Equinomics Research Private Limited.

“Generally FIIs don’t buy before general elections. They wait for the election outcome even if they have to pay a premium. I have observed this over the last two decades,” Chokkalingam said.

Pre-election jitters

Another factor could be related to the ongoing general election. Even though the market has fairly discounted the return of NDA to power, the low turnout in the elections so far seems to have instilled some degree of cautiousness among retail investors.

“Perhaps the more significant factor might be the apprehensions emanating from the unexpectedly low turnout in the elections so far,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

“One view is that the definite and smooth victory of the ruling dispensation is a bit uncertain now. The market, which has already discounted a BJP/NDA victory, is a bit unsure now. Perhaps this can be the reason for the apprehension in the market and the bulls shedding their aggressive stance,” said Vijayakumar.

Also Read: Investors take cover ahead of election outcome

Premium valuation

The Indian market is at a premium valuation against its historical average. As per Motilal Oswal Financial Services, the Nifty 50 is trading at a 12-month forward P/E (price-to-earnings ratio) of 19.3 times, at a 5 per cent discount to its own long-period average (LPA).

Kotak Institutional Equities observed that the Indian market continues to trade at expensive levels relative to history and bond yields.

“Nifty-50 valuations are a lot more palatable, though. The broader market valuations are even more expensive, with the expensiveness being inversely proportional to capitalisation, quality and risk. Some are unhinged from fundamentals and reality and entirely based on optimistic assumptions, wrong valuation methodologies and unrealistic narratives,” Kotak said.

Also Read: Why are so many Indians piling into stocks?

Unimpressive Q4 earnings

The Q4 earnings so far have been mixed and unimpressive. Kotak said the ongoing 4QFY24 season has hardly provided any positive surprise, with earnings in line with expectations.

“A few companies have delivered negative surprises. Consumption and outsourcing continue to be weak, while financials continue to exhibit strength. Limited upgrades in earnings are in sharp contrast to elevated market expectations and rich valuations,” said Kotak Institutional Equities.

Lack of fresh triggers

Experts say the Indian stock market has discounted several positives, such as the robust growth of the domestic economy, anticipated Federal Reserve rate cuts by year-end, and political stability post-elections. The lack of fresh triggers is pushing investors to book profits at higher levels.

“The markets have factored in many positives – earnings growth, stability and continuity in political leadership, reduction in interest rates, etc. Negative surprises in any of these may see a disproportionate reaction in the market,” Pawan Bharadia, the co-founder of Equitree, told Mint.

Amit Goel, the Co-Founder and Chief Global Strategist at Pace 360, said the Indian stock market was priced to perfection in April, with markets having discounted the best of corporate results, GDP growth, and the election outcome.

Now, as we get closer to the election results, some investors are feeling the jitters, said Goel.

Goel expects the market to correct more in May, with Nifty possibly coming down to 21,200 levels and Small-caps and Mid-caps taking the brunt of selling pressure.

Also Read: Expert view: Some profit booking possible after election results, says Pawan Bharadia of Equitree

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