Investor wealth shrinks by Rs 15 lakh crore as markets grapple with geopolitical crisis

In a week marked by financial turbulence, Indian stock markets witnessed a staggering decline in investor wealth, shedding a massive Rs 15 lakh crore over the course of the last five trading sessions. This precipitous contraction in wealth, primarily attributed to a confluence of concerning factors, reverberated across the Bombay Stock Exchange (BSE), as the market capitalisation of all listed companies collectively plummeted from Rs 323.82 lakh crore to a diminished Rs 308.73 lakh crore. Shareholders' fortunes have been dented in a resounding wake-up call to market participants.

The market, already reeling from previous losses, continued to grapple with heavy selling on October 25, with a confluence of factors further unsettling investors. Escalation of the geopolitical crisis in the Middle East, surging bond yields in the United States, and disappointing financial results for the September quarter from major corporates compounded the market's woes.

As the trading day progressed, both the benchmark indices, Sensex and Nifty, were heading towards their fifth consecutive day in the red. The Sensex, the BSE bellwether index, witnessed a decline of 540 points, settling at 64,049 points, while the Nifty, the NSE benchmark, experienced a drop of over 160 points, resting at 19,112 points, as of 4 pm.

What's particularly disconcerting for investors is the newfound trend in this downturn, where the broader market suffered alongside the headline indices, which had previously exhibited resilience in the face of market turbulence. On Wednesday, the Nifty Smallcap and Nifty Midcap indices both registered a decline of approximately one per cent, underscoring the widespread impact of the current market turmoil.

Experts and analysts are watching on several pivotal factors driving these unsettling market conditions. The escalating conflict in the Middle East has emerged as a primary cause for concern. The potential for more parties to become embroiled in the crisis, affecting a larger geographic region and population, is a source of unease.

Since several of these nations are significant oil producers, any further escalation in the conflict could result in a surge in crude oil prices, currently hovering at $88 per barrel. This, in turn, would lead to increased costs for raw materials across various industries and, subsequently, a higher cost of living. These factors collectively pose a severe threat to the economy, which is already grappling with inflationary pressures.

“Investor sentiment is on edge as tensions in West Asia continue to drag the market. Despite a drop in oil prices and an optimistic view of the progressing Q2 results season, investors took a cautious approach due to the expectation that a higher interest rate scenario would continue slowing future growth. However, a positive strategy is evident on large-cap stocks, amid growing geopolitical worries and valuation concerns in mid-and small-cap stocks, as overall earnings growth is being sustained,” observed Vinod Nair, head of research, Geojit Financial Services.  

Another significant factor contributing to the market's woes is the surge in yields on 10-year US bonds, which have now surpassed 5 per cent. This trend has raised concerns about capital outflows from emerging markets, including India, as foreign investors might prefer the safety of US bonds offering a guaranteed annual return of 5 per cent in risk-free dollars. This preference for the safety of US bonds over Indian equities, which are susceptible to geopolitical and currency risks, has already led to a net withdrawal of Rs 10,345 crore by Foreign Portfolio Investors (FPIs) in October, following a net withdrawal of Rs 14,768 crore in September.

“The sell-off was even more brutal within the small and mid-cap space as retail investors finally seem like throwing in the towel on the back of lacklustre earnings and no clear positive commentary from management.All eyes will be on the US 10-year bond yield, the geopolitical uncertainty along with the Federal Open Market Committee (FOMC) commentary to get direction for the week forward,” said Jaykrishna Gandhi, Head - Business Development, Institutional Equities, Emkay Global Financial Services.

Indian equities and their US counterparts are among the most highly valued stocks globally, making them vulnerable to sudden market corrections. The overvaluation is particularly apparent in the broader market, prompting heavier selling in the small and mid-cap sectors. Safety appears to lie in large-cap stocks, particularly in banking majors, which market experts view as fairly valued.

The second-quarter earnings of Indian corporations have presented a mixed picture, with some pleasant surprises and disappointments. Notably, banks have been grappling with margin contractions, and major IT companies have been contending with a slowdown in their operations. These lacklustre earnings reports have cast a shadow over the overall market sentiment.

Global markets have demonstrated weakness to compound these concerns, with European markets opening lower on Wednesday. Although Asian indices exhibited mixed results, the vulnerability of Indian markets to domestic and international factors has been laid bare in this challenging environment. As a result, investors are urged to exercise caution as the markets navigate the uncertainty posed by the ongoing geopolitical crisis and other pivotal economic indicators.