Explained | Market sell-off: 5 factors behind Friday's sharp fall

A troika of variables weighs on investor sentiment, said Dr. VK Vijaykumar, Chief Investment Strategist at Geojit Financial Services.

“One, the fast spread of the Omicron virus; two, a hawkish monetary stance of the leading central banks like the Fed and Bank of England; three, sustained selling by FIIs,” he told CNBCTV18.com.

The concerns that the explosive spread of the Omicron in Europe might lead to curbs that may in turn impact economic activity has also impacted the market, Kumar added.

Devang Mehta, Head-Equity Advisory, Centrum Wealth Management is of the view market needed an excuse for correction whether blame it on Omicron or policy stance changed by the US Federal Reserve saying inflation was not transitory.

Hawkish Fed, inflation worries: The Federal Reserve has signalled three rate hikes in 2022 and it would also end its pandemic-era bond purchases in March. Meanwhile, the Bank of England has already announced an increase in interest rates whereas the European Central Bank has said it would continue to cut its bond purchases.

Sanjay Dutt, director, Quantum Securities said the global adjustment because of inflation, excess liquidity, and tapering tantrums is the biggest factor that is bothering markets right now. Markets are basically grappling with this issue and the fact that central banks across the world are experiencing different conditions within their countries, he said.

According to Vinit Bolinjkar, Head of Research, Ventura Securities Ltd, global acceleration in inflation has spooked the markets. Fed’s hastened tapering would impact flows to EMs and India, which has been an outperformer, will surely be hit the most, he said.

Omicron concerns: Even as experts say the Omicron strain of coronavirus virus is mild as compared to previous variants, the increasing number of cases around the world and the uncertainty surrounding it have knocked investor confidence.

Echoing the sentiment, Richard Harris of Port Shelter Investment Management, said the number of COVID-19 cases is sharply rising and the virus may be used as an excuse for the market correction.

“They (central banks) also are dealing with this animal for the first time, unlike what we saw in 2008, or what we have seen in the earlier cycles, where kind of the tsunami was a common tsunami, we all had to deal with, the central bankers had to deal with. But this whole COVID wave is kind of impacting different economies in different regions in a more complicated manner," Dutt told CNBC-TV18.

FII selling: Foreign institutional investors are massively exiting Indian equities. They have net sold Indian shares worth Rs 12,986 crore ($1.7 billion) so far in December, according to provisional exchange data.  On Thursday, they sold shares worth Rs 1,468.71 crore.

According to Jigar Mistry, co-founder, Buoyant Capital, FIIs have sold in October, November, and part of December more than what they did even in March 2020. So, to some extent, that is a liquidity-driven issue, he explained.

High valuations: Be it the new IPOs coming to the market or existing equities, experts and global brokerages have been for more than month red-flagging expensive valuations. Earlier in October, Morgan Stanley, Nomura and UBS downgraded Indian equities over rich valuations.

Speaking on current valuations, Rahul Shah, co-head- research at Equitymaster, on Thursday said, “the market is expensive with the Sensex currently trading at a PE multiple of more than 27 times its long-term average of around 21 times." If earnings growth does not come in as strong as expected, the market may perhaps disappoint in 2022, he added.

He also pointed to a strong possibility of 20 percent correction or more in the coming year. “In fact, we are already down seven percent from the October highs and may go down further,” he said.

Crude oil: Oil prices dipped on Friday, putting the market on track for a weekly loss. Surging COVID cases have fears of new curbs that may hit fuel demand. Brent crude futures fell 1 percent to $74.28 a barrel while US West Texas Intermediate crude futures dropped 1.1 percent, to $71.57 a barrel. Brent is likely to witness a 1.2 percent loss this week, while WTI is poised to finish the week down 0.1 percent, according to reports.

"Look at what's happening with Omicron - that's a negative which people are trying to digest. Are we going to be in line for some new restrictions? That's what the market's trying digest," Commonwealth Bank commodities analyst Vivek Dhar told Reuters.