Nifty50 faces worst year in a decade: Will November help Dalal Street to bounce back?

NEW DELHI: October wasn't particularly kind to Dalal Street, but November could give Indian equities a chance to bounce back. NSE Nifty50's slide into oversold territory has raised hopes of a recovery, though the bulls may still have some hurdles to cross. Elevated crude oil prices and global investors' continued appetite for AI-linked markets could keep the rally in check, brokerages IIFL Capital and Nuvama have said.

So far this year, Nifty50 has already lost around 13%, putting it on track for what could be its worst annual performance in more than a decade. While the index briefly entered oversold territory in October, brokerages believe this could open the door to a short-term technical recovery rather than signal a definite end to the ongoing decline. The October derivatives series, which ended on Tuesday, saw the benchmark index finish almost unchanged. The broader market, however, remained under pressure, with mid-cap and small-cap indices declining around 4% each.

How far can Nifty recover in November?

The possibility of a rebound remains, but brokerages have flagged key levels that the index would need to cross for the recovery to gain strength. IIFL Capital sees the Nifty moving towards 23,300-23,500 on the back of its oversold position. However, it believes a stronger rally beyond 23,500 would need favourable announcements capable of improving market sentiment or bringing foreign investor flows back into domestic equities. The brokerage also cautioned that India's relative performance could remain under pressure as global investors continue to favour AI-linked investments and crude prices stay elevated.

"With factors like elevated crude prices and global participants' continued interest in the AI trade, Nifty's relative outperformance will be a tough task," IIFL Capital said in a note. Nuvama, on the other hand, pointed to the lack of a clear directional trend in the market based on investor positioning at the start of the November derivatives series, which began on Wednesday.

"Oversold conditions could lift Nifty toward 23,250, but a sustained rally would require a decisive break above 23,480," Nuvama said. The oversold reading is based on the relative strength index (RSI), a technical indicator that measures the momentum of a stock or index. A reading below 30 indicates oversold territory and can point to the possibility of a short-term rebound. However, it does not confirm that the broader downtrend has ended.

Foreign investors pare bearish bets

Foreign investor positioning in the derivatives market also showed a shift during October. According to Nuvama, foreign investors reduced their short positions in Nifty 50 index futures from 267,000 contracts at the beginning of the October series to 221,000 contracts by its end. They also increased their long positions in single-stock futures while reducing open interest in index futures during the monthly derivatives series. Nuvama said the shift indicates that foreign investors have moved away from aggressive bearish positioning towards a more balanced stance.

AI trade and crude oil continue to weigh on sentiment

The performance of Indian equities in October stood in contrast to the broader emerging market trend. MSCI's emerging markets index declined 7.4% during the month as investors reassessed their exposure to AI-linked investments amid soaring valuations. However, the brief unwinding of the AI trade did little to sustain buying momentum in Indian equities.

"Even when the AI trade unwound briefly during the month, apart from some brief short covering-led rally, momentum fizzled out quickly (in India)," IIFL Capital said. Crude oil prices remain another concern for the domestic market. As the world's third-largest crude importer, India is particularly vulnerable to higher oil prices, which can fuel inflation, strain public finances and put pressure on corporate profits.

IT stocks provide the only silver lining

At the sectoral level, information technology stocks emerged as the biggest source of support during the October derivatives series. IT stocks surged 16.3%, helped by better-than-expected quarterly results and a brief unwinding of the AI trade. The gains helped benchmark indices offset losses linked to elevated oil prices. IIFL Capital described buying interest in IT stocks as the only silver lining of the October series.

Looking ahead, Nuvama sees meaningful additions to bullish positions in IT and telecom stocks in the November series. In contrast, investor positioning in metals, automobiles and fast-moving consumer goods (FMCG) remains defensive.