Mumbai: India’s benchmark equity indices posted their worst loss in five financial years in the year ended Thursday as foreign investors pulled money out of volatile emerging markets in a flight to safer havens.

Domestic investors turned net buyers in the year, helping narrow losses, but it wasn’t enough to prevent the BSE’s Sensex and the National Stock Exchange’s Nifty from ending the year in the red.

The 30-share Sensex fell 9.36% in the year to 25,341.86 points on Thursday—its worst performance since 2011-2012, when it dropped 10.5%. The 50-share Nifty shed 8.86% in the financial year, its biggest decline since a 9.23% drop in 2011-2012.

At the end of March 2015, investors had expected a turnaround in the economy to translate into a pickup in corporate earnings growth, said Sanjeev Prasad, senior executive director and co-head of Kotak Institutional Equities, an arm of Kotak Securities Ltd.

“But things didn’t work out that way," said Prasad.

China’s slowing economic growth and an end to the zero-interest rate era in the US fanned foreign investors’ risk aversion towards emerging markets in a year that confirmed the era of the commodity price supercycle.

A second successive year of below-average monsoon rainfall in India and tepid rural demand crimped corporate earnings growth. There were no signs of a pickup in the private sector investment cycle as companies struggled to repay debt and banks coped with a growing burden of bad loans.

Foreign institutional investors (FIIs), who are the main driving force of Indian equity markets, pulled out a net $2.2 billion from stocks in the financial year, the highest outflow since 2007-08, when the global financial crisis took hold.

The path ahead may not be rosy either, although analysts are divided on what lies ahead for Asia’s third-largest economy.

India’s economic growth will slow to 7.4% in 2016-17 from 7.6% in 2015-16, with tepid external demand offsetting the pickup in domestic demand, the Asian Development Bank said earlier this week, citing a weakening of expansion in public investment under fiscal constraints and deleveraging of corporate balance sheets.

“As far as the global factors were concerned, we had a big collapse in global commodity prices. There were earnings, downgrades," said Prasad, adding that investors had stopped differentiating between producers and consumers of oil as risk-aversion set in. “The whole emerging market pack suffered the brunt."

The US Federal Reserve raised interest rates for the first time in almost a decade in December, but the tightening has been less aggressive than had been anticipated, Prasad said.

“The global emerging market outlook went bad. Fed changing course was expected, and that was one of the reasons for market outflow," said Amisha Vora, joint managing director at Prabhudas Lilladher Pvt. Ltd.

Vora noted that the market had also run up a lot in the previous year. The Sensex gained nearly 25% in the year to March 2015.

Only three of 18 sectoral indices—BSE Consumer Discretionary Goods & Services, BSE Consumer Durables and BSE Energy—posted positive returns in the year gone by.

BSE Realty and BSE Capital Goods indices were the top losers among sectoral indices, dropping 26.20% and 25.63% respectively.

Bharat Heavy Electricals Ltd., Tata Motors Ltd and Larsen & Toubro Ltd were the top losers among Sensex firms, losing 51.44%, 29% and 28.52% respectively.

While the markets closed the financial year in the red, the month of March saw a strong rebound across global markets including India. The MSCI EM index rose 12.65% in the month, its best gain since October 2011.

The Sensex rose 10.17% in March, its best performance since January 2012. It was the best March for the Sensex since 1992.

“The kind of inflows in March are surprisingly large, and mostly due to risk-on trade. US Fed’s rate hike was not as aggressive as earlier presumed," said Kotak’s Prasad.

“People are assuming some amount of strength in EMs (emerging markets), on the back of firm commodity prices," said Prasad.

Not everyone is convinced the rally will last.

“We think the recent rally will end soon and is likely the 9th such counter-trend move since the EM equity bear market began in late 2010," Morgan Stanley said in a report on 31 March. “Estimate revisions continue to be negative and yet EM firms are still missing heavily downwardly revised consensus estimates," Morgan Stanley analysts said, adding that they are sellers in this rally.

Most market participants expect the new financial year to be better in the hope that corporate earnings growth will pick up.

If things stay stable globally, Prasad expects the Sensex to post a 10-12% rise over the next financial year.

Prasad sees a 15% increase in earnings for Nifty-50 companies in the year to March 2017 and 17% for the year to March 2018.

Vora expects the Nifty to move higher into a range of 8,500-8,750 points by the end of the new fiscal year. Any correction would be capped in the range of 7,250-7400 points, she says.

Still, the outlook for emerging market flows remains tough to predict. The flows would depend on the strength of the US economy in comparison to emerging markets.

If the Fed were to raise rates twice in the second half of the year without any major improvement in the fundamentals of emerging market economies, “we cannot rule out one more sell-off in EMs", Prasad said.