Lok Sabha election or China effect? 4 reasons why Sensex has fallen 2,000 points in May

During today's session, fell nearly 800 points but recouped some of the losses later on as voting progressed in the fourth phase of . In both the last two voting days on May 7 and April 26, Sensex and had ended in the red.

A lower in the first 3 phases of the elections has increased perceived uncertainty on the outcome, even if the consensus is still firmly rooting for a return of the incumbent, insiders say.

Top leader tried to address investor concerns saying that the stock market has witnessed bigger dips than this one and this should not be linked to . "There may have been some rumours. You can buy before 4 June, the market will shoot up," Shah told a TV channel.

While the consensus reason for the fall is due to election-related nervousness, some analysts believe that the selling is due to a change in FPI stance from ‘sell , buy India’ earlier to ‘sell India, buy China’ now.

On the technical charts, has entered an oversold region now and the downside looks very limited from current levels.

Here are 4 key reasons behind the fall in Sensex and Nifty:

1) Election

A low voter turnout in the first 3 phases of the election has led to some modest jitters among market participants that lower voter turnout may be a harbinger of anti-incumbency and could work against the BJP’s favour this year.

The impact of the nervousness is also being felt on elevated levels of India VIX, which indicates that traders are expecting heightened volatility ahead.

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2) China effect

One of the reasons behind the fall is the flow of emerging market funds towards China. The Shanghai Composite is up by 4% and Hang Seng up by 14% in the last one month.

"This is likely to be a near-term trend triggered by the cheap valuations of Chinese stocks and the relative high valuations of India. It is important to understand that India’s long-term prospects are much better than China’s," said Dr. V K Vijayakumar of .

Chris Wood of Jefferies had recently raised weighting in China in the Asia Pacific ex-Japan portfolio as a tactical move.

3) Valuation

The sharp rally in broader markets over the past couple of years has meant that valuations are stretched in select pockets. While a part of the re-rating can possibly be explained by pick-up in earnings growth, the implied long-term earnings growth in many of the stocks is also much higher now, Akhil Kalluri of told ET Markets.

4) Earnings

Despite Q4 domestic earnings largely meeting expectations, there's a noticeable moderation in the overall earnings landscape, analysts say. In the last one month, Nifty IT has lost around 7% of its value while Nifty Bank is down 4% in the earnings season.

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