Kotak stays cautious on India, sees limited value despite stock market crash
Recent months have seen Indian stocks decline amid global economic uncertainty and high valuations. With substantial outflows from Foreign Portfolio Investors and retail investors, key indices have dropped significantly, affecting the Indian rupee and overall market capitalisation.
The sharp downturn in the Indian stock markets over the last few months has failed to create much value, according to brokerage Kotak Institutional Equities. The Indian stocks have been going through a rough phase in recent months as the world's fifth-largest stock market faces heightened uncertainty due to global economic concerns, elevated valuations, and cautious investor sentiment.
To be precise, markets have been in a continuous slide since October as weak earnings have raised concerns about stretched valuations, while slower economic growth has led investors to believe that a near-term recovery is unlikely.
Amidst this, escalating trade tensions have further fueled worries, prompting investors to flee from risky assets, causing the frontline indices to trade at a six-month low.
These concerns have overshadowed the Union Budget and the RBI’s decisions, despite the budget focusing on boosting consumption and the central bank providing additional stimulus by cutting the repo rate for the first time in five years.
Donald Trump's tariff announcements have become a major concern for overseas investors. Experts believe his actions could escalate into a full-blown trade war involving the world’s largest economies, potentially fueling inflation, affecting central banks' rate-cut cycles, and ultimately leading to an economic slowdown.
Amid this backdrop, foreign portfolio investors (FPIs) are rebalancing their portfolios, shifting away from risky assets to more secure investments in debt markets. Emerging markets (EMs) are witnessing increased outflows, with India seeing ₹1.15 lakh crore in outflows in less than 2 months from exchanges. Since October, FPIs have pulled out nearly ₹3 lakh crore through exchanges.
The sustained selling by FPIs has brought India's market capitalisation below the $4 trillion mark for the first time in over 14 months. The selling has not only impacted the markets but also exerted significant pressure on the Indian rupee, which has fallen nearly 1.50% in 2025 so far, making it the second worst-performing Asian currency after the Indonesian Rupiah.
Apart from FPIs, selling by retail investors, HNIs, and family offices is also adding pressure to the markets, leading the Nifty 50 and Sensex to drop 3% YTD. The broader market is experiencing even more severe pain, as both the Nifty Midcap 100 and Nifty Smallcap 100 indices have corrected up to 18% so far this year.
Not much value yet despite sharp correction
Despite this sizeable correction, domestic brokerage firm Kotak Institutional Equities asserts that the recent downturn has not created any meaningful investment opportunities in the market.
"We do not find much value in most parts of the market despite the recent sharp correction. The Indian market may remain lacklustre, weighed down by rich valuations across sectors and stocks, potential earnings downgrades, and higher-for-longer global interest rates. The 3QFY25 results season did little to change our cautious view of the market," said the brokerage.
The brokerage believes that the battle between FPIs and DIIs will likely continue over the next few months, with FPIs expected to maintain their cautious stance given the challenging global investment environment for emerging markets, while DIIs are likely to deploy aggressively due to high cash positions with mutual funds and possibly strong (though tapering) inflows from retail investors.
However, a period of low trailing returns could dampen return expectations among retail investors and affect inflows into domestic mutual funds. The 12-month returns of the NSE-50 Index, the Nifty Midcap 100 Index, and the Nifty Smallcap 100 Index have dropped to 5%, 3%, and (-)3%, respectively, with negative returns of 5%, 12%, and 15% over the past six months, the brokerage noted.
Challenges emerging in both macro and micro
According to the brokerage, the country's macroeconomic position has deteriorated somewhat in the past few months, with a continued slowdown in consumption demand (especially for basic staple items), reflecting income and inflation challenges for low-income households. There is also a likely slowdown in government capex (one of the drivers of the economy until recently) and increased pressure on the external position (low BoP surplus, a sharp decline in FX reserves, and a weakening INR).
Meanwhile, the brokerage's analysis showed that the net income in Q3FY25 of the Nifty 50 companies grew by 8.8%, which is moderate growth compared to its estimate of 7.8%. Additionally, the net income of the companies under the brokerage's coverage came in below expectations at 8.2%.
"3QFY25 EBITDA of the Nifty 50 Index increased by 6.7%, versus our expectation of 5.1% growth. The weak 3QFY25 operating results again highlighted some of our long-standing concerns about the Street’s optimistic profitability and volume assumptions, as well as disruption threats across sectors," said the brokerage.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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