Market’s midnight: Why ‘buy the dip’ is no longer a sure bet

Mumbai: In Midnight’s Children, Salman Rushdie’s acclaimed novel, midnight symbolises the moment when darkness gives way to a new beginning. After nearly 18 painful months, investors are beginning to wonder whether equities may be approaching such a moment.

Markets rarely reward philosophical reflection. Yet bear markets have a peculiar way of forcing it upon investors. A sea of red across portfolio screens tends to do that. But as they snap out of that mood, they are confronted with more practical questions: When will the sell-off end? Should I buy now? Why has the buy-the-dip strategy that worked so reliably since 2020 suddenly stopped working?

Market wisdom holds that sell-offs, especially during wars, often present buying opportunities. The logic is that the market tends to overreact, pricing in some of the direst possible outcomes for the global economy. This time, as the conflict between US-Israel and Iran drags on, investors and analysts have not yet factored in the full extent of global economic damage, but for some aggressive crude price forecasts. Most do not see the war dragging on for long. While the conflict has lasted longer than what the market had expected, with Iran in no mood to give up, investors expect the Street to grow tired and indifferent to the war, much like the ongoing Russia-Ukraine conflict.

So, does that mean this is the right time to buy Indian stocks? For investors accustomed to buying the dip, it is a natural question. After all, the Sensex and Nifty are down 7% this month alone, while the declines in several mid-cap and small-cap stocks are even steeper, extending the correction seen over the past 18 months.

According to an ETIG study, 760 of the top 1,000 NSE-listed stocks by market capitalisation have fallen since September 30, 2024-the phase when the reversal in India’s bull market began. Of the stocks that declined, nearly 70%, or 518, declined over 20% in the period. Further, 33%, or 250, dropped between 40% and 70%.

This sell-off has certainly removed some of the froth seen in these stocks in 2024, but those appear to be only the excesses. Valuations, especially in the mid-cap and small-cap segments, are still far from cheap enough to justify deploying dry powder aggressively.
Moving up the market-cap ladder, valuations of bluechips appear more palatable, according to senior money managers. Even there, however, the jury is still out on whether they qualify as screaming buys. Technically, Indian equities may be oversold in the near term, making a case for nibbling at some of the more beaten-down names in anticipation of a rebound. Should the conflict ease and crude prices retreat, a relief rally of 5-7% cannot be ruled out.

Yet, the case for aggressive buying doesn’t sit well with the market backdrop. For value seekers, the market is anything but cheap. Even after the correction, valuations mostly remain elevated by regional and historical standards. That’s why many see the market less as a screaming buy and more as a sell-on-rise.

Part of the reason is that the current geopolitical tensions may have overshadowed deeper concerns. Before the war dominated narratives, the market had been contending with the potential disruptions from artificial intelligence. For several sectors, particularly in technology and services, the conflict has merely pushed the debate around future earnings visibility to the sidelines rather than being resolved.

With so many moving parts–from crude prices and geopolitics to global liquidity and technological disruption–few investors appear willing to go all in on equities. At the same time, exiting the market after a sharp drop may not be an option either.

For now, the core investment principles remain unchanged: diversification across asset classes and a degree of defensiveness in portfolios. Fixed income does not appear to offer compelling opportunities either, while gold may rebound if the US dollar reverses its winning run.

At this moment, investors are dealing with a kind of market midnight. But unlike Rushdie’s midnight, the one on Dalal Street is marked by mixed signals and limited visibility. It still isn’t a market that would reward bold calls, but it doesn’t warrant selling out either.