Fresh wave of sell-off hits D-Street as Sensex, Nifty fall 2% each; 4 reasons that triggered the fall

A sudden strong wave of profit-booking hit the Indian equity market in the last two hours of the trading session on September 21, dragging Sensex 907 points lower and Nifty to 11,218 in intraday trade.

Sensex closed 812 points, or 2.09 percent, down at 38,034.14 while Nifty ended 254 points, or 2.21 percent, lower at 11,250.55.

BSE Midcap and Smallcap indices closed 3.43 percent and 3.61 percent down, respectively.

The selloff was across the board as Realty and Telecom indices plunged almost 6 percent while Metal and Auto pack cracked up to 5 percent.

4 Factors that triggered the sell-off:

The second wave of COVID-19: The market witnessed a knee-jerk reaction to reports that some European countries are contemplating to reimpose lockdown measures as the COVID cases see a spike.

As per media reports, British Prime Minister Boris Johnson was pondering the second lockdown in Britain while Spain and other European countries were witnessing fresh restrictions due to the coronavirus pandemic.

Weak global cues: European stocks headed for their worst fall in almost two months on Monday, hit by worries about a surge in coronavirus cases across the continent and a slide in HSBC and Standard Chartered following reports that put the UK banks among those moving large sums of allegedly illicit funds over the past two decades, reported Reuters.

This was following a sell-off in US equities on Friday as all three major US indices posted a third straight week of declines.

Rich valuation of the market: Valuations of the market was a concern for investors as analysts believed a healthy correction in the market was in the offing.

Valuations of global as well as Indian markets are in a rich zone which may not sustain for long.

Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities underscored Nifty50 is trading at nearly 22 times on one year forward PE as compared to previous peaks seen at about 19 times on forward valuations.

"The Nifty Midcap 100 index is trading even higher than the Nifty50 which suggests some kind of overvaluation in mid-caps vis-à-vis the large-caps. The 10-year average forward PE of Nifty50 works to nearly 16 times and a current forward PE of 22 times indicates it is trading nearly 3 standard deviations above the 10-year average," Oza said.

Looking at the global and domestic valuations, markets worldwide are ripe for a correction but few factors like low bond yields, suppressed Dollar Index and heavy liquidity infusion by central banks are keeping valuations at elevated levels, Oza explained.

Profit-booking: Recent outperformers, such as ICICI Bank, Reliance Industries and Bharti Airtel were witnessing profit-booking in today's session as overhangs related to rising COVID cases and Indo-China tensions keep investors nervous.