Three out of four BSE 500 stocks in the red

Market breadth negative this year even as Sensex, Nifty managed to hold up

Indian stocks continue to be under selling pressure this year even as the benchmark indices have remained largely range-bound. According to data, 374 of the BSE 500 stocks have offered negative returns in 2018 despite the Sensex declining only 0.5 per cent during the year. As many as half of the BSE 500 companies saw their shares tumble over 10 per cent each.

Analysts attribute this pessimism in equities to weak domestic cues, including a delay in earnings recovery, concerns over toxic assets in banks and increased taxes on market transactions. Escalating fears of a trade war between the US and China and hardening of bond yields are also weighing down investor sentiment.

“Macro concerns linger and will likely affect market returns. The bottom-up corporate earnings trend has improved somewhat, but is unlikely to offset the effect of macro concerns. While the Nifty has dipped 9 per cent from its peak, we believe the upside will be capped. A potential slowdown in domestic equity flows is the near-term concern,” said Mahesh Nandurkar, India strategist, CLSA.

Technology player Vakrangee saw its shares fall nearly 61 per cent in 2018, making it the worst-performing stock on the BSE 500 index. Shares of Kwality and Balrampur Chini also declined 51 per cent and 43 per cent, respectively. Punjab National Bank, hit by a ~130-billion fraud, saw its shares tumble 39 per cent during the year.

Weak earnings have been one of the biggest challenges for Indian equities over the last few months. Brokerages have been trimming their earnings estimates for the March quarter, prompting investors to review their equity strategy. Even the earnings estimates for the quarter-ended March 2018 seem disappointing. According to the consensus estimates, the bottom line of the Nifty companies is expected to grow 11 per cent year-on-year during the three months ended March. This is lower than 11.5 per cent growth reported in the year-ago period. The trigger assumes significance as India Inc’s profits have seen limited growth in the last three years on account of several economic and regulatory factors.

“The clamour for earnings recovery is becoming louder. This is particularly because the last three years were characterised by a muted earnings performance

due to macro disruptions and several policy changes pertaining to asset quality in the banking sector. We expect to see earnings recovery this fiscal (year). However, the market is likely to be distracted by several macro factors along the way,” said Gautam Duggad, head of research, Motilal Oswal Institutional Equities.

According to market participants, declining inflows into home-grown mutual funds (MFs) are also a key concern. Net inflows into equity MFs in March nearly halved to ~66.6 billion from ~162.7 billion in February. MFs played a crucial role in the market rally last year even as overseas funds preferred to adopt a wait-and-watch approach. However, analysts are anticipating redemption pressure on MFs in the medium term if the selling pressure in the markets continues.

Indian markets have witnessed several downsides since February when the current phase of market correction began. Hardening of bond yields and the Centre’s decision to reintroduce the long-term capital gains tax spooked investors. This was followed by a ~130-billion banking fraud and concerns about a widening fiscal deficit on account of rising crude oil prices.