The prolonged selling pressure on IT stocks, sustained selling in bank stocks, and the monsoon overhang on FMCG and auto stocks combined to leave sentiment weak and struggling. FIIs continuously sold stocks in these sectors, causing a significant correction in their valuations. Many of these stocks are at multi-year lows and still look weak.
Global market sentiment, however, remained strong even as domestic sentiment kept weakening. Money flowed out of our markets relentlessly, with every single trading day seeing negative FII flows. Our market seemed to have decoupled completely and significantly weakened under the weight of the semiconductor and A.I. boom. The rupee showed no sign of reversing direction, and every rally in our currency reversed the very next day.
In the face of this almost hopelessly weak sentiment, two events turned the tide. First, the RBI announced that it would bear the hedging costs for FCNR deposits. Then, the week ended on very high hopes of a US-Iran deal forming. This sharply reversed Brent crude prices to $82 per barrel by Saturday; something we simply could not have imagined when the week began.
The coming week should be crucial for our market. More good news on the war front will definitely reverse the sentiment, induce short covering, and trigger buying. Banking stocks, which looked bleak until a week ago, seem to be preparing for better days. While we do not know if large Indian banks have reached a long-term bottom, sentiment seems to have reversed direction after the RBI move. Further moves by the government and RBI to stabilise the rupee, aided by lower crude oil prices, falling demand for gold imports, and slowing FII selling, are all positives. Everything we thought of as adverse factors could combine in a way the market is not quite ready for.
Any further improvement in sentiment will reverse the downtrend in other beaten-down sectors too. Domestic investors are not quite positioned in their portfolios for a macro reset because recent events diminished hopes of near-term positive outcomes. Exactly when domestic sentiment was reaching a point of despondency, global factors and policy moves are converging to actually improve sentiment.
Market bottoms for the long term often form around times like this. While we don’t clearly know if we are at this point, indicators all point towards a change in direction. Any improvement in news flows on the progress of the monsoon can decisively impact the market direction. Investors need to watch the evolving scenario very closely to gauge market sentiment, adjust their investing strategy, and invest in themes which have been significantly beaten down in recent months.
