Indian Stocks See 'Healthy Correction' Amid Weak Quarterly Earnings, Says Chris Wood

Indian stock market has witnessed a "healthy correction" after a record rally and has particularly impacted the most expensive segments, Jefferies' Christopher Wood said in his latest 'Greed & Fear' note.

The relatively inexpensive private sector banks have started to outperform of late, amid expectations of a potential rate cut by the Reserve Bank of India, Wood noted.

The correction comes in the context of weak second-quarter earnings, which has seen the biggest earnings downgrades since early 2020, according to another Jefferies report. The brokerage firm has cut fiscal 2025 earnings estimates for over 60% of the 98 companies it covers, which reported second-quarter earnings.

"Above normal rains and weak government spending has impacted earnings outcomes," Jefferies said. A clear trend should emerge in the December quarter, but some intrinsic slowdown appears likely, it said. Jefferies now expects Nifty fiscal earnings per share growth at 10%.

"This reflects the impact of a cyclical slowdown which has been signalled by Jefferies’ India office high-frequency data," it said.

India's small and mid cap stocks have seen a bigger correction as the Nifty Midcap 100 Index and the Nifty Midsmall cap 400 Index are down 10.2% and 9.7%, respectively from their September highs, Wood said in a note.

Global funds have sold stocks worth over Rs 1.41 lakh crore since Sept. 27, according to provisional data from the National Stock Exchange. Domestic institutions have been net buyers of shares worth Rs 1.33 lakh crore during the same period.

The strong inflows into domestic equity mutual funds continue, while total domestic flows into equities are still running ahead of the expanding supply, the note said.

Indian stocks have not yet fully priced in the extent of the slowdown that could be on the cards, despite the benchmarks seeing the worst session in over four years, Bernstein Research said in a previous note. The brokerage expects "further but limited moderation" in Nifty from current levels to 23,500, which remains their year-end target.