February 28, 2024

Global investors expected imminent rate cuts from the Fed, but some members signal a lack of urgency.

Benchmark indices Sensex and Nifty are down by nearly 2 percent and there is a sense of panic on the Street. We look at the factors contributing to the sell-off and what investors need to keep in mind.

Why is the market down sharply?

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The market appears overbought at this point, with every category of investors—FIIs, mutual funds, individual investors—bullish. The Nifty rallied by 1000 points in just 32 sessions, a similar frenzy is being seen in shares of small and micro caps as well. When too many people take a similar view, the market tends to surprise.

Does this mean that the bullish trend has reversed?

Too early to say. The market has shrugged off big corrections and continues to move higher since March.

Also read: HDFC Bank contributes 70% to fall in BSE Bankex, Nifty trades below 21,800

What are the immediate triggers for today’s correction?

The fall is in line with the weakness in global markets. Investors globally were betting that the Fed would start cutting rates soon. But now the signal coming from some of the Fed members is that they are in no hurry to cut rates.

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Is that all?

No. Stocks are beginning to look expensive after the recent run-up. Some of the smart investors who have seen many market cycles are starting to book profits, knowing that prices cannot rise one way.

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Will mid and small caps correct more?

A lot depends on the third quarter earnings. The majority of the stocks are factoring in a rosy picture. Where earnings growth does not match expectations, the fall can be steep.

What about large caps?

Because large caps did not rise as much as the mid, small and micro-cap names, they are better placed at this time. Brokers say many smart investors have already started increasing exposure to large caps over the last couple of months.

If large caps are attractively valued, why have they fallen sharply today?

When investors lose money in one set of stocks, they try to compensate for it by booking profits in other stocks.  That could be one reason large caps are under pressure.

Will foreign investors turn bearish on India?

Unlikely, given that the Indian economy’s fundamentals are much better compared to peers. GDP is growing at a decent rate, inflation is under control, corporate balance sheets are in good shape, and earnings growth is healthy in most sectors.

What should I as a retail investor do?

Continue with your mutual fund SIPs, and if you own stocks, assess your portfolio. This could be the time to cut down exposure to stocks with weak fundamentals, but which may have run up along with the market. Increase exposure to quality stocks irrespective of large, mid or small when the market gives an opportunity.