FPI sell off, earnings cut; rebound on the horizon for Indian markets?

The Indian stock market is expected to remain choppy in the coming months with analysts predicting continued volatility in the coming months following an 8 percent correction on NIFTY 50 index in October. An Emkay Research explains the market downturn stems from widespread earnings downgrades and a sharp rise in foreign portfolio investor (FPI) outflows amounting to $12.8 billion in October alone.

The market is expected to witness further corrections in the short term while experts predict a recovery in the second half of FY25.
The Emkay report highlights that while most NIFTY50 companies have faced earnings per share (EPS) cuts of over 1 percent in October, the broader market appears more resilient. Only 15 percent of the top 375 companies have seen earnings downgrades below 5 percent as compared with 26.5 percent downgrade rate in the previous quarter. Elevated valuations of companies continue to be a problem with NIFTY 50 currently trading at 21.7 times forward earnings, leaving room for recovery.

FPI selling has weighed heavily on sentiment. Domestic institutional investors (DIIs) have absorbed 80 percent of FPI sales. However, Emkay analysts note that the FPI outflow has significantly impacted market confidence.
The report also indicates a shift in sectoral preferences, with analysts advising an overweight stance on materials, energy, and utilities citing favourable positioning. Consumer staples have moved to underweight, reflecting valuation challenges and weaker-than-expected earnings. The BFSI sector presents an opportunity with a likely upside from improved liquidity conditions. 
The model portfolio has undergone substantial changes with increased wight on Tata Motors , Bharti Airtel and Larsen & Toubro. It has trimmed positions in stocks like Hero MotoCorp and TCS and exits from TVS Motor, Varun Beverages, ITC, Hindustan Unilever and InterGlobe Aviation.

The model portfolio has also undergone substantial adjustments, including increased weight on Tata Motors , Bharti Airtel, and Larsen & Toubro. Meanwhile, it trims positions in stocks like Hero MotoCorp and TCS , and exits from TVS Motor, Varun Beverages, ITC, Hindustan Unilever , and InterGlobe Aviation.

However, despite early caution, the Emkay report projects an optimistic second half of FY25 as government expenditure kicks in and the market stabilises.