It established a stimulant for future corporate margins to improve. This led to a rebound in retail and foreign investor inflows as the risk-reward proposition persuaded smart money to pour in as stock prices were attractive after being in gestation for 1.5 years.
Having said that, the domestic stock market is not completely out of the woods because the global economy persists with headwinds. The key issues are a slowdown in business, prolonged inflation, and the high cost of interest.
Even though stock prices may have moderated, broad valuations have not valued the full trouble. Like the one-year forward valuations of large and midcaps continue to trade at a premium.
India’s one-year forward consolidated P/E is at +18x, marginally above the long-term average of 17x. The Q4FY23 result is mixed, and the outlook suggests a downgrade in earnings for 2023.
Basically, at this point, the market is neither expensive nor cheap. It is a mixed situation in which India has an edge but with global caveats.
We have to invest as more than 1/3rd of the pocket is attractive, but in that, stock and sector-specific picks are the only layout. We have been suggesting value buying as the key factor in determining stock picks.
In that, two sectors that fit well are MNCs and infrastructure. MNCs are underperforming, being hit by the muted performance of foreign parents and a weak global outlook. Now they are available at a historical discount and supported by stable domestic business.
While global business is expected to improve in 2024. Infra is available at a discount valuation, and the outlook continues to be robust, led by government spending.
We have a national election next year, which could bring volatility in between. But this should not be a big issue because the balance sheet position is good with a low debt/equity ratio and trimming of working capital requirement.
The banking sector is expected to maintain a robust outlook in the long term; however, the level of stock performance may moderate during the year due to a temper in business growth and profitability in the short to medium term.
This is in anticipation of high costs of operation, a slowdown in credit growth in 2024, and the uncertainty of global banks.
Deep value is visible in the IT and Pharmaceutical sectors due to low valuation and a stable long-term outlook. However, volatility is expected in the short term due to a slowdown in US and European business. They are in a good position to implement the accumulation strategy for a long-term investor.
Some pockets are very expensive, like Capital Goods, Power, Realty, and Manufacturing. However, these sectors are expected to remain expensive in India for a long time. This is because these are the areas of growth for India.
We can expect volatility due to the supreme valuation and any small setback, like a governance, company & industry slowdown and changes in government policy, will have a larger than anticipated effect on the stock price. Hence, stock analysis is very important here.
In a similar fashion sector like FMCG, Consumption and Auto are expensive but expected to maintain a positive bias in the short to medium term.
This is because of the benefit of the drop in raw material costs. Its defensive nature, peak in interest rates, and continuity of consumer vehicle demand will help to perform in line with the market.
Notably, pent-up demand is slowing down in consumption and passenger vehicle, a larger effect is expected by the end of FY24.
Generally, the small caps category is the most attractive on a long-term basis, as the segment is available at a 15% discount to the long-term average.
A staggered style of investment is suggested in the area. The degree of price correction is deep, inviting a short-term bounce too.
(The author is Head of Research at Geojit Financial Services)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of Economic Times)