Two-thirds of BSE 500 stocks are in a bear market

At the close of trading on Friday, the benchmark Sensex had fallen 16% from its 52-week high. As many as 341 stocks, or 68% of the shares that make up the BSE 500 index, have fallen more than 20% from their 52-week highs. In other words, more than two-thirds of the BSE 500 index is in bear territory.

Moreover, sectoral indices such as the BSE Bankex and the BSE Power, Oil and Gas, Realty and Metals indices have plunged more than 20% from their 52-week highs at Friday’s close, indicating that these sectoral indices are in bear market territory as well.

For the overall market, though, we are still some distance from a bear market. “Technically, a bear market is when the market has fallen by more than 20%; in that context we still may not be in a bear market,” said Gaurav Mehta, vice-president of institutional equities at Ambit Capital Pvt. Ltd.

However, as the market continues to dive, we are fast approaching that level. Ambit Capital Research is expecting the National Stock Exchange’s Nifty to fall to 7,200 points and the Sensex to around 22,000 points for value to emerge for investors.

Foreign institutional investors (FIIs) have sold around $2.6 billion worth of Indian equities in August. In September so far, they have sold shares worth $333.2 million. FII selling in the derivatives and cash markets is suggesting a further downside, said Siddharth Bhamre, head of equity derivatives and technicals at Angel Broking Pvt. Ltd.

Not all of the fall in the market is due to global factors; a part of it reflects the fundamentals of the corporate sector. Earnings growth continues to be disappointing. Following the lower-than-expected gross domestic product data for the June quarter, CLSA has cut earnings estimates for Indian companies by another 4% for 2015-16 and 8% for 2016-17.

While it has also lowered its Sensex target for December 2016 by 6%, at 30,000 points, it’s still much higher than current levels. “The recent drop in global commodity prices helps India’s macro as it lowers India’s twin deficits and inflation pressures. While India will likely emerge as a relative beneficiary, a worsening global growth outlook would negatively impact corporate earnings,” CLSA said in its India Strategy note on 1 September.

Sectors with the highest potential earnings cut would be metals and oil, followed by cement, public financials, property and capital goods, according to CLSA.

Of course, this is playing out as seen from the sharp fall of 44% in the BSE Metals index from its 52-week high, as it is sensitive to the Chinese slowdown and commodities slump (see chart). The Realty index is down 34%, in line with the fall in real estate prices and sluggish sales. The Oil and Gas index has plunged 27%, hurt by inventory losses, and the Power index and Bankex have dropped 26% and 23%, respectively, from their 52-week highs, haunted by fuel supply issues and asset quality concerns.