Indian equity markets experienced a sharp sell-off with broad-based selling pressure affecting investor sentiment across segments. The correction has been attributed to a combination of global uncertainties and domestic earnings disappointments, though fund managers maintain a cautiously optimistic outlook for the medium term.

Market Performance and Impact

Indian equity markets witnessed significant volatility with substantial losses across major indices. The selling pressure was broad-based, affecting different market segments with varying intensity.

Foreign institutional investors continued their selling trend, extending a pattern that has seen Indian equities underperform global peers over the past year. The selling pressure was particularly intense in small- and micro-cap stocks, with market breadth weakening significantly.

Global Factors Driving Volatility

Global developments played a central role in shaping market sentiment during the ongoing World Economic Forum in Davos. Heightened geopolitical tensions and uncertainty around global trade dominated investor discussions.

Chirag Mehta, Chief Investment Officer and Fund Manager at Quantum AMC, noted that the current volatility is not driven by domestic fundamentals. "It's more related to global uncertainties emanating from tariff-related issues and geopolitical developments," Mehta said. He emphasized that this is not an India-centric issue, adding that "India is more inward-looking, and much of the impact is already priced in."

Concerns around trade protectionism, including continued rhetoric from US President Donald Trump on imposing higher tariffs and threats on Greenland, added to worries about the global growth outlook and cross-border trade flows.

Earnings Disappointment Compounds Pressure

Earnings disappointment also contributed to negative sentiment, with market reactions being more severe than expected. Aishvarya Dadheech, Founder & Chief Investment Officer at Fident Asset Management, said the scale of the sell-off was unexpected, especially since geopolitical tensions over the weekend had not immediately impacted markets.

"What actually played out is the market's disappointment with the earnings season," Dadheech explained. Despite several large companies reporting results broadly in line with expectations, stocks saw sharp declines. "The market didn't really appreciate the numbers," he said, citing heavy falls in names such as ICICI Bank, HDFC Bank, and Havells.

Alok Agarwal, Head – Quant & Fund Manager at Alchemy Capital Management, highlighted additional domestic concerns. "The month started with poor GST numbers for December and subdued capex data for November," he said, adding that pressure to meet budgeted targets has increased amid slower economic momentum and weaker tax collections.

Cautiously Optimistic Outlook

Despite near-term challenges, fund managers expressed confidence in India's medium-term prospects. Mehta noted that India is in a much better position after nearly 1.5 years of relative underperformance, with the valuation premium having narrowed. "As global uncertainties subside, India should see lesser impact compared to other markets," he said.

Agarwal echoed a cautiously constructive outlook, stating that while volatility may persist in the near term, medium-term prospects are supported by policy action and improving valuations. "The coordinated steps taken by the Government and the RBI to reactivate the economy are likely to show effect in coming months," he said.

Investment Opportunities Emerge

Fund managers acknowledged that the current correction is creating selective opportunities across various sectors. Mehta stressed the importance of a disciplined, bottom-up approach, noting that they "were cautious on markets over the last year and kept cash levels elevated."

"As markets have corrected and many mid- and small-cap stocks are down 30–40 percent or more, there is potential opportunity," Mehta said, adding that investment decisions need to be stock-specific and factor in how global events could affect earnings.

Dadheech emphasized their continued bullish stance, stating they "remain bullish and do not believe in taking cash calls." Their focus remains on fundamentals rather than trying to time the market, with valuations across several companies having become attractive following the correction.

Market expert Rohit Srivastava has issued a cautionary warning about equity investments, advocating for substantial cash positions as global markets face mounting uncertainties. The founder of Indiacharts & Strike Money is currently maintaining 100% cash on a personal level while recommending clients hold between 30% to 50% cash positions.

Early Signs of Major Market Reversal

Srivastava believes global equity markets are experiencing the initial phases of a significant trend reversal. Speaking to CNBC-TV18 on Tuesday, he emphasized that what initially appeared as trade-related concerns have evolved into broader geopolitical challenges.

"We are in very, very early stages of what might end up being a major or significant trend reversal in global equities. It's been a good ride, but I think it's gone away from what looked like only about trade to becoming a geopolitical problem," Srivastava explained.

Given that geopolitical issues typically require extended periods to resolve, he anticipates a multi-month phase of market uncertainties ahead.

Indian Market Performance and Wealth Erosion

Indian equity markets have experienced substantial declines from their recent record highs, with the Nifty 50 index retreating significantly from its January 2 peak. The market correction has resulted in considerable wealth destruction across BSE-listed companies.

Global Market Pressures and Trump's Tariff Threats

The current market selloff has been amplified by renewed tariff rhetoric from US President Trump, who has threatened to impose a 10% tariff on European allies. These threats are specifically targeted at nations that do not support his plans regarding Greenland, the self-governed territory under Denmark's jurisdiction in the Arctic region.

The geopolitical tensions have created risk-off sentiment across global markets, with US futures also declining sharply while Wall Street cash markets remained closed on Monday due to a holiday.

Strategic Recommendations for Investors

Srivastava advocates for a defensive approach, urging investors to prepare for potential downside scenarios rather than being caught unprepared. His strategy emphasizes capital preservation over potential gains in the current environment.

"In short, it is not a good time to be in equities. You should create as much cash as you can," he stated.

The chartist specifically recommends preparing for a 10-20% downside in global equities, emphasizing the importance of preparation over speculation about the extent of potential declines.

"So, you should prepare for 10-20% kind of downside in global equities. And it's better to prepare for that. Sometimes people will come in and question, will it be so much or will it be that much? What that approach does is it doesn't help you to prepare. So, I would say prepare for the worst and then let's hope it doesn't get that bad," Srivastava concluded.