NIFTY 50 has corrected from 18604 levels that were hit during October 2021. Nifty correction has steeped from the level and hit a low of 15671 during March 2022. In percentage terms, the correction has been 15.8% from the highs. FIIs have been a relentless seller in the index heavyweights since October 2021. FII has sold nearly 3 lakh Cr worth of Indian equities to date since it hit the high. Even during 2022, the selling speed has accelerated, and sold Rs. 2.15 Lakh Cr. The selling spree has led to the highest level since 2009. The major factors that led to the corrections have been geopolitical tension, rising inflation, supply chain disruptions, re-emergence of Covid-19 cases in China etc.

As we all know that Nifty50 index is skewed toward the financial services sector. FII has been a seller in banking and financial services stocks and that can be seen in the underperformance of the Banking index which eventually dragged NIFTY 50. The banking sector's influence on a NIFTY index can be understood by the fact that it has a 34.82% weightage as of April 2022.

The other sectoral heavyweights are Information Technology with 16.15% and Oil, Gas & Consumable Fuels (largely due to Reliance Industries which has 12.86% weightage in the Nifty index) with 14.62% weight respectively. Automobile and Auto Components has 5.17% weightage and Metals & Mining has 3.25% weightage.

IT sector has also been a drag on the Nifty as the sector has been in trouble due to supply-side issues. The auto sector also did not help as it was going through a cyclical downturn. Metal has been an outperformer but the weightage has been low.

A large part of Nifty Index weightage consists of the cyclical industry hence Nifty Index also goes through cyclical upturns and downturns in earnings. NIFTY valuation has cooled down from the TTM PE(x) level of 28x in Oct. 2021 to 19.5x on 19th May 2022. Nifty average PE level happens to be around 20x levels. Domestic money (DIIs) has been largely a buyer in the recent corrections.

What has changed now and outlook:

- Russia-Ukraine war has been dragged on long and the market has factored this into the price.
- The daily selling quantum by FIIs/FPIs has reduced.
- Domestic money inflow has been strong and gives strength to Indian markets and shields them from sharper falls.
- There has been good news on the inflation front, as there is the hope of a good monsoon season that will help to calm down food prices.
- The supply chain is also on the path of revival after the Covid-led lockdown in china.
- There is also an easing in commodity prices from higher levels helping sectors that are dependent on it.
- Semiconductor-led headwind is also behind the auto sector.
- Earnings from Nifty companies have been healthy during Q4FY22 despite pressure on margins.
- Banking sector has delivered the best credit growth after many years and credit growth has been on the rise. Q4FY22 has been the best in the last six years for the banking sector. With the rise in repo-rate, pricing will improve for the Banks which will help drive the NIMs. India's 10-Yr Bond yield has also cooled off.
- Dollar index has also stabilized to 101 levels from the peak of 105, which is likely to help emerging market flows.

Overall, risk-reward has been favorable as peak macro headwinds are likely to be behind and valuation has also been reasonable for NIFTY 50 at the current level of 16500.

Analysis by Mr. Shashi Kant, Principal Officer - Brighter Mind (SEBI Registered Investment Advisor INA100016363).