India's Stock Market Plummets Amid Economic Slowdown and Profit Downgrades

The Indian stock market has been experiencing a significant downturn in recent months, with global fund managers showing no rush to invest in the country despite record-low valuations. The benchmark NSE Nifty 50 Index is trading at 18 times forward earnings, which is lower than its September peak but still higher than its emerging Asian peers.

This sentiment reflects the challenges facing India's economy, including a slowdown in growth, profit downgrades, and potential US tariffs. Traders looking for bargains within Asia are increasingly favoring Chinese equities, which are experiencing a bull run driven by developments in artificial intelligence.

Challenges Posed by Economic Slowdown

The economic slowdown in India has resulted in a decline in consumption, particularly in rural areas where demand is typically weaker. The government's latest figures show that the country's economy will expand at a four-year low of 6.5% in the current fiscal year, which is significantly lower than the nearly 9% average seen over the past three years.

Analysts expect growth to remain below this level for the coming years, which would be a departure from the strong economic performance India experienced before the COVID-19 pandemic. This scenario has led to a decrease in consumer spending and business investment, further exacerbating the economic slowdown.

Impact on Corporate Profits

The economic downturn has also taken a toll on corporate profits in India. More than 60% of companies comprising the Nifty 50 Index saw downgrades to their forward profit estimates last month, according to JM Financial Ltd. This indicates that Indian earnings revision momentum is among the weakest for developing economies in the region.

Investor Sentiment

Despite these challenges, some investors are finding value amid the relentless selloff. Veteran emerging-market investor Mark Mobius believes that "the market will recover" and that it's a "great time to look for bargains." At the same time, selling by company founders and employees has become less intense, easing pressure on the market.

However, other investors remain cautious, citing lingering risks such as US President Donald Trump's reciprocal tariffs and his assertion that India charges the US higher levies than the US charges it. A growing chance of a recession in the US is also a concern given that Indian stocks have a positive correlation with US equities.

Gradual Recovery Expected

While some investors are optimistic about the Indian market, others believe that any recovery will be gradual and led by earnings rather than a vertical or sudden increase. Rajeev Thakkar, chief investment officer at PPFAS Asset Management, notes that "we are getting there in terms of an attractive entry point in the market" but does not see reasons for a rapid turnaround.

Foreign Investment Remains Low

Despite the low valuations, global fund managers continue to show caution when it comes to investing in India. Julie Ho, a portfolio manager at JPMorgan Asset Management, notes that "overall market expectations are still high, and broad valuations remain rich." This hesitation is likely due to the lingering risks mentioned earlier.

Conclusion

The Indian stock market's downturn reflects the country's economic challenges, including a slowdown in growth, profit downgrades, and potential US tariffs. While some investors see value amid the selloff, others remain cautious due to lingering risks. A gradual recovery led by earnings is expected, but foreign investment remains low until these risks are mitigated.

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