Market Meltdown: Indian stocks lag behind global peers in May – key reasons explained

At the beginning of May, the Indian market experienced a surge in optimism, driven by several key factors. Positive sentiment was bolstered by strong Foreign Portfolio Investor (FPI) inflows, easing geopolitical tensions in the Middle East, and the expectation of continued political stability in the upcoming Lok Sabha elections.

However, as the month progressed, the landscape swiftly shifted. Optimism began to wane as these factors turned unexpectedly. FPI inflows dwindled, geopolitical tensions resurfaced, and political uncertainties intensified, casting a shadow over the previously optimistic outlook.

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As per the recent media reports, a lower voter turnout so far in India’s general election has raised questions about whether the ruling Bharatiya Janata Party (BJP) and its allies can achieve the landslide victory predicted by opinion polls just a month ago.

Meanwhile, the sharp rally in 2023, which continued during the first quarter of CY24, has led to stretched valuations for the market, prompting investors to secure profits. Consequently, benchmark indices, which had initially soared on the wings of optimism, logged the worst performance in May.

This downturn evaporated investors’ wealth at an alarming rate, leaving many startled by the sudden shift in market dynamics. Over the past five sessions, the broader market saw a majority of stocks turn red, with many of them trading close to their lowest levels in several months.

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The recent sell-off hit the public sector banks hard as they faced sector-specific challenges stemming from the Reserve Bank of India’s draft guidelines on project finance. These guidelines propose that lenders allocate more funds for loans to under-construction infrastructure projects.

Mid- and small-cap stocks were also hit hard in the recent sell-off. Both clocked healthy gains in April, after a sharp downtick in March, but they couldn’t sustain them in May, leading them to trade at multi-week lows.

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Hong Kong leads the rally in Asia

The Indian market, which had previously outperformed its global counterparts, experienced a significant downturn in May, resulting in underperformance.

Both the Nifty 50 and S&P Sensex dropped by 2.86% and 2.79%, respectively, in the current month so far, marking their largest monthly declines since August 2023.

Conversely, major Asian indices saw comparatively modest declines in May. The Nikkei 225 fell by 0.62%, the Topix by 0.76%, and the Kosdaq Composite index by 0.21%, while South Korea’s Kospi added 1.49%.

China’s Shanghai Composite index and Hong Kong’s Hang Seng index bucked the trend, rising by 1.48% and 6.80%, respectively, with the latter hitting a nine-month high in the previous session.

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China’s economy exhibited signs of recovery, with April data from the country’s customs agency showing stronger-than-expected growth in exports and a surge in imports. Exports rose by 1.5% year-on-year, while imports climbed by 8.4%, resulting in a trade surplus of $72.4 billion for the month.

According to market experts, Chinese and Hong Kong markets offer attractive valuations, with PEs around 10, in contrast to India’s expensive levels, leading to increased fund flows into these markets.

Smart recovery

In the US, the Dow Jones, S&P 500, and Nasdaq Composite all saw gains in May following a sharp downturn in April. The Dow surged 331.37 points in the previous trading session, closing at 39,387.76 and marking its longest winning streak since December.

The S&P 500 and Nasdaq Composite index ended at one nearly month high on Thursday after rate cut expectations jump.

Overall, the Dow Jones rose by 4.35%, the S&P 500 rallied by 3.54%, and the Nasdaq Composite jumped by 4.40% in May so far.

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The latest weekly jobless claims data has surged to its highest level since August, fueling expectations that the U.S. Fed may consider cutting interest rates at some point this year.

Additionally, UBS estimates a decline in inflation for April, which is scheduled for release next week, further boosting sentiment in the US markets.

Britain’s stocks hit a record high

The Bank of England hinted at potential interest rate cuts as soon as next month, with Governor Andrew Bailey suggesting that more reductions could be on the horizon.

The BoE’s Monetary Policy Committee maintained the key bank rate at 5.25% on Thursday, the highest level since 2008 and in line with expectations.

Deputy Governor Dave Ramsden and external MPC member Swati Dhingra advocated for a cut to 5%. After cutting rates in March 2020 as the coronavirus pandemic swept the world, the BoE began raising borrowing costs in December 2021, earlier than other leading central banks to counter high inflation, which peaked at 11.1% in October 2022.

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Following the signal of a potential rate cut, both the FTSE 100 and Stoxx 600 index reached record highs on Thursday, posting gains of 2.91% and 2.35%, respectively, for the month so far.

FPI sell-off spree continues

In May, foreign investors withdrew ₹28,885 crore from Indian equities, marking the largest outflow since January 2024, when ₹25,744 crore was withdrawn. Throughout May, they continued to be net sellers in all six trading sessions.

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Analysts attribute the pullback to various factors, including the expensive valuations of Indian stocks compared to their global counterparts, as well as the reallocation of funds to China and Hong Kong due to their relatively cheaper valuations.

Disclaimer: We advise investors to check with certified experts before making any investment decisions.