Investor confidence in share market shows no signs of abating. The benchmark Sensex has breached the psychological 50,000-mark thanks to roll out of COVID vaccines, better-than-expected corporate earnings in third quarter of FY21 and ample global liquidity. The upside momentum seems to continue with record FII inflows and Robinhood investors taking direct participation in equities.
"Sensex touching 50,000 in 2021 is like Indian cricket team winning test series in Australia against all odds of COVID-19. While economic data is about the past which is improving month on month, Sensex is reflecting the positivity about the future," says Nilesh Shah, Group President & MD, Kotak Mahindra AMC.
However, the valuations do look stretched. So, how do you make sense of the market here on? Here are key trends:
Markets vulnerable to correction
The direct participation by retail investors has been one of the key reasons behind the sharp market rally. Market experts have been cautioning about 4-5 per cent correction on any negative news. But, even that seems to have been factored in. "Markets are so stretched that we can't afford an accident. Any adverse news, global or domestic can be disastrous. A small correction of 4-5 per cent has been getting absorbed since Robinhood Investors, who have earned huge profits in the last few months, are pouring in further liquidity on any dips. However, a bigger fall, will lead to a panic from these investors, resulting in a cascading effect, as they would be witnessing a big fall for the first time," says independent market analyst Ambareesh Baliga.
According to Kotak Institutional Equities, Nifty is ruling at a price multiple of 22.4 times based on its FY22 EPS estimate and 18.8 times based on its FY23 EPS estimate on full-float basis. "The market (Nifty-50 Index) looks fully valued on our usual valuation parameters although possible earnings upgrades and low bond yields may partly mitigate high absolute valuations," the brokerage says in a report dated January 18.
Value to outperform growth
If the last few years belonged to growth and defensive names, the rally over the next few years is expected to come from value and contra buys.
"H22013 to H12020 was all about Growth, Defensives, Growth at any price (GaaP) and narrow rallies. This is about to change as value will outperform growth i.e. cyclicals / core Economy sectors will outperform Defensives. If we look at relative performance charts of FMCG versus Nifty, consumption versus Nifty or private banks versus Nifty, they have been showing weakness since March 2020, while metals, real estate and automobiles are in a stronger position," says Alok Agarwala, EVP - Chief Research & Investment Officer, Bajaj Capital.
Bofa Securities, which prefers growth over value stocks, also believes the latter will do well in the near-term.
Also read: Sensex glows more than gold
"We do have a bias towards growth stocks because in India investors predominantly come for growth. So far as value is concerned, some of the value companies have regulation and ESG concerns. If you exclude them, you will be left with very few value stocks that could potentially do well. So, by and large, our preference is to have more of growth over value but clearly, select value stocks will do well," says Amish Shah, India equity strategist, BofA Securities.
Sectorally, the brokerage is bullish on Financials, Industrials, Materials, Staples, Telecom and Pharma.
Buy disruptive themes
The disruption theme is hard to play in India as hardly any disruptive businesses exist in the listed space. Investors take exposure to global equities to play the same. However, Information Technology sector is an outlier. "We do not have Zoom, Google and Amazon of the world. The only way to play disruption theme in India is via IT. IT plays have started gaining traction with large deal wins," points out Agarwala.
"Buy businesses that disrupt others and are protected from disruption; avoid businesses that can get easily disrupted," he adds.
Also read: Sensex's Six-Ratans
Midcap, smallcap to outperform largecap
As key indices touch all-time highs, marketmen believe the broader market will outperform the Sensex and Nifty. "It doesn't mean we don't expect correction. If Sensex and Nifty shed 5 per cent, mid and smallcap being the high-beta, may fall by 7-8 per cent, but the bounceback - whenever that happens -- will be sharper. So, a clear relative outperformance to largecap is expected. Invest meaningful amount in mid and smallcap stocks," says Agarwala.
Shah of Bofa Securities advises to stick to organised businesses. "We are positive on organised midcap companies that have been gaining market share, working on rationalising the costs, have a decent balance sheet and focus on business expansion."
The easy monetary policies by global central banks, increasing FII participation in the domestic market and the change of the guard in the US are some of the global factors that worked in our favour. Going forward, we need to keep an eye on how global events pan out. "Although most of the Central Banks across the globe have indicated an easy money policy with low interest rates, any change in this policy could lead to a reverse flow from emerging markets. And despite vaccination drive, if the new strains of Covid show a resurgence in the developed economies, that could be another reason for a sharp correction," says Baliga.
It's hard to predict how long the euphoria will sustain in the stock market. The crux lies in your asset allocation and financial goals. As markets keep hitting fresh highs, a staggered approach to investment is the way to go from here on.
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