"Bull Market" Extinguished! India's Nifty Index Plummeted 6% in October, Marking the Worst Month in Four Years, as Foreign Capital Flees

India's "bull market" has cooled.

As corporate earnings weaken and foreign capital continues to sell off, India's benchmark index, the NSE Nifty 50, is set to experience its worst month since 2020.

Data shows that the NSE Nifty 50 index fell 6% in October, marking its first monthly decline since May this year and the largest monthly drop since the pandemic began in March 2020. Similarly, the Sensex index of the Bombay Stock Exchange (BSE) has also seen a similar decline.

According to Bloomberg statistics, foreign institutions have net sold over $10 billion worth of Indian stocks in the month leading up to October 29.

The historically high valuations of the Indian stock market have deterred investors. A report from Citigroup indicates that the continued outflow of foreign investors may weigh on the market's recent performance. Analysts at the bank noted that after this month's adjustments, Indian stock market valuations have retreated from their peaks, but on most metrics, these valuations remain nearly one standard deviation above long-term averages.

Goldman Sachs recently downgraded its rating on Indian market stocks from "overweight" to "neutral," warning that the overall valuation of the Indian stock market has reached 24 times expected earnings, at historical peak levels, which is a common concern among investors. The bank predicts that as the economic cycle slows and drags down corporate earnings, the Indian market may experience volatility in the next 3-6 months.

With the U.S. election approaching, the Indian stock market may see significant fluctuations

Currently, options traders are betting that the U.S. election will trigger significant volatility in the Indian stock market.

Data shows that in the NSE Nifty 50 index options expiring after next week's U.S. election voting, call options with a strike price of 24,500 and put options with a strike price of 24,400 have surged by over 60,000 contracts in the past week, making them some of the most popular contracts on the local exchange. On Wednesday, the index closed at 24,340.85 points.

Avani Bhatt, Senior Vice President at JM Financial, stated that this indicates market participants may be purchasing "straddle options"—a volatility betting strategy—to prepare for "sharp movements in either direction." In a straddle option, traders buy put and call options with different strike prices but the same expiration date.

As traders await the election results from India's largest trading partner, the United States, the stock market volatility index is also climbing. The index tracking the volatility of the NSE Nifty 50 has risen by 2.7 points this month, marking the largest increase since May.

Are investors fleeing India for China?

Goldman Sachs warns that the slowdown in India's economic growth has begun to impact corporate earnings. Compared to the first quarter, the recovery rate of Indian corporate earnings in the second quarter was below expectations. As of late October, among the 18 MSCI India companies that have reported results, 11 did not meet expectations. Affected by the overall stock market environment, India's largest IPO deal—Hyundai Motor India—fell below its issue price on its first day of trading, closing down 7.2%.

The overvaluation of India and the slowdown in corporate earnings are exacerbating investor sell-offs and withdrawals. Prashant Tapse, Senior Vice President of Mehta's equities, stated, "Foreign investors are fleeing Indian stocks and investing in relatively undervalued markets like the Chinese stock market, especially after the Chinese government announced stimulus measures."

Data shows that some overseas Asian funds withdrawing from the Indian market are shifting to build positions in the Chinese market.

HSBC's research report on October 24 indicated that in September this year, Asian overseas funds actively built positions in the A-share market. Overseas growth funds increased their holdings in the mainland market for the first time in 10 months. Asian funds' holdings in the Chinese stock market are currently at a five-year high (measured by Z-scores).