Stocks are approaching a bear market; More pain ahead, suggest three key charts

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The value of Indian stock markets is already down nearly 20% from its January peak.

As soaring inflation and the end of global easy-money policies drag Indian stocks down from all-time highs, three charts show the pain isn’t likely to end any time soon.

The S&P BSE Sensex Index fell more than 15% from its October high, closing in on the 20% loss that signals a bear market. The sale comes as rising costs and a record drop in the rupee forced the country’s central bank to join global peers in raising interest rates.

The value of the Indian stock market is already down almost 20% from its January high of around $3.7 trillion. The lackluster economic backdrop, combined with an unprecedented outflow of foreign investors and earnings estimates that look set to plummet, are clouding the outlook for a rebound.

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“We expect the markets to correct further from here,” said Benaifer Malandkar, chief investment officer at Raay Global Investments Pvt. “It is expected that by the second quarter, most negative news, the outcome of Fed actions will be priced in.”

Foreign flight

Foreign investors have sold Indian stocks at a record pace, taking about $32 billion off the market since September. The withdrawal of foreigners is part of a wave that is also hitting countries like South Korea and Taiwan.

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“India is not isolated as it is part of the emerging market basket, and clearly emerging markets are no longer in favor,” Raay Global’s Malandkar said. “Until the US Fed rate peaks, we will see redemptions happening in emerging markets.”

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Pink ratings

The decline in Indian stocks has been mainly caused by the contraction in valuations so far. Earnings estimates for the NSE Nifty 50 index have yet to register a significant decline like that seen in MSCI Inc.’s broader measure for Asian stocks.

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In recent weeks, strategists at Sanford C. Bernstein Ltd., Bank of America Corp. and JPMorgan Chase & Co. have expressed concerns about the earnings optimism surrounding India. In expectation of a rebound in valuations, lower estimates should drive equities further lower.

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Outstanding Small Caps

Small stocks have been hit harder by investor risk aversion, with Indian small- and mid-cap stock gauges already entering bear markets. The breadth of the market has weakened, with just 16% of stocks in the S&P BSE 500 index trading above their 200-day average level, the lowest level in two years.

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