Introduction
At the start of May, the Indian stock markets were on a bull run. Several factors contributed to this, such as easing geopolitical tensions in the Middle East, strong inflows from foreign portfolio investors (FII), and a feeling of a stable government coming to power following the ongoing Lok Sabha elections.
However, things didn’t remain the same, and as May progressed, optimism gave way to volatility and fear, resulting in the underperformance of Indian stocks. This blog explains the key reasons for this underperformance.
Reasons Contributing to Underperformance
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Aggressive Selling by FII
In May 2024, aggressive selling by FIIs, who hold substantial stakes in Indian equities, significantly contributed to the underperformance of Indian stocks. FIIs started offloading their shares in large volumes, triggering a sharp decline in stock prices and leading to widespread market downturns. Foreign investors sold stocks worth over Rs 28,000 crores in May.
The impact of this selling spree was particularly noticeable in sectors where FIIs had heavy investments. The withdrawal of foreign funds created a liquidity crunch, which made it difficult for stocks to recover.
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Lower Voter Turnout in Ongoing General Elections
Low voter turnout in the ongoing general elections has significantly contributed to the underperformance of Indian stocks. Low voter participation often reflects a lack of public confidence in the political process or dissatisfaction with the available choices. This uncertainty can make investors wary, reducing market activity and lowering stock prices.
Moreover, low voter turnout can result in an unpredictable election outcome, which adds to the market's volatility. Investors prefer stability and clear, predictable governance, which can be compromised when election results are uncertain. The cumulative turnout during the first four phases, as per the Election Commission, stood at 66.95%.
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Proposed Regulatory Framework on Project Financing by The Reserve Bank of India
The Reserve Bank of India’s (RBI) diktat on project financing further contributed to the downfall of stocks. Although the guidelines aim for more rigorous oversight and promote transparency and risk management within the sector, the immediate effect has been a surge in uncertainty and concern among investors, leading to a substantial decrease in stock prices for banks.
Already navigating a challenging economic landscape, public sector banks face added pressure to comply with the new regulatory framework. The draft guidelines emphasise higher provisioning norms and tighter credit evaluation processes for project loans, which could limit their lending capabilities and profitability in the short term. This heightened scrutiny spooked investors and prompted a swift sell-off that has significantly lowered the market valuations of these banks.
What Should Be Your Approach?
Though Indian stocks underperformed globally in May, there's no reason to panic. As an investor, it's crucial for you to:
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Stay Focused on Your Long-term Goals
It's vital to remain focused on your long-term investment goals. Short-term fluctuations are a natural part of the market, and reacting impulsively to these changes can hinder your overall investment strategy. Remember, successful investing often involves weathering periods of volatility and maintaining a disciplined approach.
You shouldn't panic in response to temporary market declines. Instead, review your investment plan and ensure it aligns with your financial objectives. Consider this an opportunity to reassess and rebalance your portfolio if necessary.
Blocking market noise is essential when stocks have underperformed. Market noise includes rumours, speculative news, and short-term fluctuations that can distract you from making rational decisions. You can avoid the pitfalls of reacting impulsively to market noise by focusing on fundamental analysis and long-term performance. This approach helps maintain a clear strategy and lowers the chances of making decisions hinged on temporary market movements.
You should prioritise your investment goals and the intrinsic value of their stocks over the surrounding noise. An underperforming stock might still hold strong long-term potential despite short-term setbacks.
Wrapping it Up
Historically, markets have rewarded those who have exhibited patience amid turbulence. Follow the principles of asset allocation and diversification to navigate tough times. The Indian economy is quite resilient and will eventually bounce back in the long run. It’s crucial to remain invested and focus on your long-term financial goals.
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