Diwali Dilemma: Investors Balance Risk & Reward This Diwali Season

This Diwali, India's financial markets reflect a mixed sentiment as traders celebrate amidst an October correction that shaved off 6.5 per cent from the Nifty50. Despite record foreign investor (FII) outflows and high global volatility, the domestic markets remain resilient, achieving significant milestones in Samvat 2080 and holding potential for further growth in the coming year.

Samvat 2080: A year of record highs and resilience Samvat 2080 was exceptional for Indian markets, with the Nifty50 scaling an all-time high of 26,277 in September, driven by strong domestic inflows and sector-specific gains. Unlike past years, this market rally sustained itself with minimal drawdowns, experiencing only a single-day, 10 per cent dip on 4 June, aligned with general election results. Even with a volatile October, which saw Rs 1,05,000 crore in FII outflows—the highest ever—the market dip was limited, highlighting domestic strength and investor confidence.

During the past year, all sectors except Media posted gains of 18 to 65 per cent, benefiting from rapid sectoral rotation and robust quarterly earnings. This sectoral performance, coupled with positive macroeconomic indicators, bolstered Indian equities and demonstrated the resilience of the Indian economy amidst global challenges.

FII Selling Amid Global Reallocations
Foreign institutional investors have been offloading Indian equities, which is a significant trend this Diwali. The recent FII sell-off exceeded Rs 97,205 crore in October 2024 alone, with a similar monthly outflow from equity markets, highlighting the pressures on domestic markets. This continued FII exodus is primarily driven by attractive valuations in other emerging markets, such as China, which has recently seen significant stimulus support.

Riya Oswal Bafna, Co-fund Manager, Purnartha, notes that FIIs are shifting their portfolios to regions like China, where lower P/E ratios present opportunities. Bafna adds, “Indian stocks appear pricey compared to markets like Hong Kong’s Hang Seng, where the P/E ratio stands around 12.1 compared to India’s Nifty50 at 22.8.” She further explains that concerns around India’s growth and corporate earnings are contributing to FII caution, while domestic investors have provided some buffer by bringing in over Rs 24,000 crore monthly.

Anirudh Garg, Partner and Fund Manager, Invasset PMS, adds that FIIs are favouring liquidity and dollar-based assets to hedge against currency depreciation in emerging markets. “The strong dollar, driven by higher U.S. yields, makes U.S. assets more appealing, especially amid global economic uncertainties,” Garg states.

Evaluating India’s Long-Term Attractiveness Despite Short-term Shifts
The short-term FII reallocations do not necessarily reflect long-term sentiment. While the “China story” has seen some setbacks, India’s structural economic strengths remain appealing. However, Garg highlights that heightened global risk aversion has led FIIs to prioritise stability over growth temporarily. Divam Sharma, Founder and Fund Manager, Green Portfolio, echoes this, stating that the “long-term FIIs will continue to stay in India, even if short-term reallocations are taking place.”

Sectoral Picks For Diwali And Market Correction
Investors are finding new sectoral opportunities amid the market correction, with various analysts highlighting sectors likely to perform well. Amit Goel, Co-Founder and Chief Global Strategist, Pace 360, recommends oil marketing companies (OMCs), gas distribution companies, and defence stocks, with stocks like BPCL, IGL, MGL, HDFC Bank, and ICICI Bank as potential high-performers. He emphasises defence stocks such as HAL and BEL, which have corrected by 30 to 40 per cent over recent months.

Sharma identifies sectors like consumer discretionary, 5G, and metals as attractive, driven by Diwali demand and recent government policies. He also suggests telecom and chemical stocks as growth areas, noting that the correction has presented buying opportunities in these sectors.

Market Sentiment For Diwali Based On Past Performance
Reflecting on Diwali season returns over the past decade, historical data indicates mixed trends for the Nifty50 in the month leading up to Diwali. The data shows varied returns, with notable years including a 6.25 per cent surge in 2020 and a 3.9 per cent drop in 2015. For this Diwali, however, analysts are approaching the market with tempered expectations given the correction’s scale.

This historical data suggests that market sentiment around Diwali can be unpredictable, particularly in a volatile year like 2024.

Consumer Sector Performance And Rate Cut Hopes
Despite high festive hopes, the consumer sector remains under pressure, with companies like HUL, Tata Consumer, and Polycab facing weak consumer demand. Many analysts argue that the RBI might need to consider a rate cut to spur demand. Goel believes that “Indian economy does need rate cut stimulus and some fiscal loosening to support urban consumer spending,” which could lift demand over the next two quarters, especially given a promising Kharif crop harvest.

However, Bafna suggests that while a rate cut might help, the RBI may remain conservative, likely considering any adjustments only after observing Federal Reserve policy moves.

Diwali Outlook: Navigating Caution And Opportunity
As the market correction and geopolitical uncertainties linger, the Diwali season presents a cautious yet opportunity-driven environment for investors. Large-cap stocks may offer a safer investment choice, with many investors shifting focus from high-valued mid and small-caps to resilient large-cap companies amid volatility.

Garg emphasises that this approach aligns with capital preservation while seeking steady growth. “Large-cap companies tend to be more resilient during volatile periods, allowing for balanced risk and reward.”

The ongoing correction has provided select buying opportunities, and for long-term investors, this Diwali could represent a time to capitalise on these dips, even as broader uncertainties remain.