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"The Indian stock market is underperforming this year with the Nifty delivering negative 3.4%  returns vis-a-vis 4.19 % returns in S&P 500 and 11.7 % returns in Europe. The underperformance of the broader market is huge with 9.6% cut in Midcaps and 22% cut in Smallcaps. This is clear reversion to mean from overvalued territory. The basic reason for this underperformance is the sharp slowdown in corporate earnings this year. Q3 results indicate only around 7% earnings growth. The fact is that a modest single digit earnings growth doesn’t deserve high valuations. This is the basic reason behind the relentless FII selling which has impacted the market. Appreciating dollars aggravated the problem.

Only indications of an earnings recovery and declining dollar can reverse the weakening market trend. This may happen soon. India’s macros are strong and a growth and earnings recovery are on the cards. Inflation in the US is likely to rise, thanks to the Trump tariffs, and the Fed is likely to respond hawkishly to that pulling the US markets and dollar down. This will happen, but we don’t know when."

 

 

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