Sensex nears 20% drop; investors see risk aversion

Sensex nears 20% drop; investors see risk aversion

The S&P BSE Sensex Index has fallen more than 15% from its October high, nearing the 20% loss that denotes a bear market. The central bank has joined global peers in raising interest rates because of the rise in costs and a record plunge in the rupee.

The Indian stock market's value is already down nearly 20% from its January peak of $3.7 trillion dollars. The outlook for a rebound has been hampered by an unsupportive economic backdrop and an unprecedented exodus of foreign investors and earnings estimates that appear poised to tumble.

"We expect the markets to correct from here," said Benaifer Malandkar, chief investment officer at Raay Global Investments Pvt. The outcome of the Fed's actions is expected to be priced in by the second quarter, most negative news. In September, overseas investors have been selling Indian stocks at a record pace, with about $32 billion being withdrawn from the market. The retreat of foreigners is part of a wave that is hitting nations like Taiwan and South Korea.

India is not in isolation, as it is part of the emerging market basket, and clearly the EMs are out of favor, said Malandkar, Raay Global spokesman. We will see redemptions happening across EMs until the US Fed rate is at its peak. The drop in Indian stock market has been caused by the valuation contraction so far. Earnings estimates for the NSE Nifty 50 Index are yet to clock a significant decline like that seen in MSCI Inc.'s broadest measure for Asian equities.

Over the past few weeks, the strategists at Sanford C. Bernstein Ltd., Bank of America Corp. and JPMorgan Chase Co. have expressed concerns about the earnings optimism that has surrounded India. Estimate cuts are likely to pull stocks down if there is a rebound in valuations.

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Smaller stocks have been hit harder by investor risk aversion, with gauges of small and mid-sized Indian shares already entering bear markets. Market breadth has weakened, with only 16% of S&P BSE 500 Index stocks trading above their 200 day average level, the lowest level in two years.

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