 "Stock market, NSE")
Benchmark indices have come off 4 per cent from their peak. Experts don't rule out further correction amid a slew of headwinds such as rising US bond yields and crude, geopolitical uncertainties and earnings disappointments. Also, India's General Elections could emerge as another uncertainty if state election results are not favourable, experts added.
The yield on the 10-year US benchmark bond rose to over five per cent for the first time since 2007 on Monday, weighing on equity market sentiments globally.
Though the yield has receded to below 5 per cent since then, it remains at a multi-year high, which will continue to exert pressure on capital flows.
Already, the benchmark Sensex and Nifty 50 have closed in the red for five straight sessions. The Nifty 50 has declined 3.5 per cent during the period, while the Sensex is down 3.6 per cent.
"In addition to rising bond yields, as markets turn wary of further escalation of the war in Israel, risk-off sentiments are now clearly evident. Domestic macro continues to remain resilient... However, risk of deficient rainfall and reservoir levels still lingers on nascent farm income and rural recovery," JM Financial said in a report.
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The higher US yields pose risks for equity markets on two accounts — exodus of foreign capital to US bonds due to better risk-adjusted returns and economic slowdown due to higher borrowing costs.
Analysts say that the negative sentiment may continue to pull down the market, even as price-to-earnings (P/E) valuation reverts towards its long-term averages.
"Valuation-wise, Nifty is in a comfortable zone at around 18-19 times the one-year forward P/E. However, the negative sentiment owing to global factors may continue to weigh on the market. The midcap and smallcap segments may see a larger correction, going by their higher valuations," said Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services.
Experts say earnings disappointment by a host of marquee firms, particularly in the IT and FMCG space, makes it difficult to justify premium valuations.
According to some fund managers, the market continues to trade at an elevated level but a meaningful correction from current levels can provide a good entry opportunity for long-term investors.
Some say investors should utilise their dry powder in the event of another 4-5 per cent drawdown from current levels in the benchmark indices. This may entail a 15-20 per cent correction in mid- and small-caps.
"The current equity market is trading at somewhat elevated levels given the valuations, and investors requiring near-term cash flows should shift away from equities. Investors with a five-year-plus view can continue to remain invested," said Rajeev Thakkar, Chief Investment Officer, PPFAS Mutual Fund.
Some experts point to the fact that the impact of geopolitical issues on the equity market is generally limited to the short term. "If the conflict escalates, and if energy prices remain high, it could keep inflation levels elevated, leading to higher interest rates, which can potentially depress equity market valuations globally. However, it is important to note that, historically, the impact of geopolitical tensions has always been transient with no bearing on long-term performance," said Anand Shah, Head – PMS & AIF Investments, ICICI Prudential AMC.
Experts also point to the possibilities of positive developments, which can steer the market upwards. "Any positive development on the geopolitical side or a decline in US bond yields and oil prices will act as a positive trigger for the market," Khemka said.
