Sectorwise, metals, and banks are likely to outperform while IT and pharma are likely to underperform
Since 2006, Nifty corrected in excess of 10 percent in 16 instances, including the 2008 global financial crisis, and also clawed back within three months on most occasions, Elara Capital said in a note.
Based on the empirical analysis, Elara Capital found out that during the correction phases, on an average, Nifty corrected 14 percent and the duration of the correction was 2 months (58 days).
Post the correction period, the Nifty recouped the entire losses in just three-month period, offering a 15 percent return. The correction and recovery are steeper for mid-caps relative to large-caps, said the note.
However, Indian markets recover faster (during the first three and six month period) relative to the US, DMs, China and EMs
Usually, a pick up in GDP (US and India) and strong global market rally prevail six months prior to steep market corrections.
Most often, deteriorating macros — rise in crude oil prices, concerns around global growth (peaking of GDP growth) — and rich valuations trigger and prevail during steep corrections.
Elara Capital expects the market to rebound from the current levels due to: (a) valuation comfort (Nifty is 5 percent premium to 5-year average); (b) easing crude prices; (c) pause or deceleration of INR depreciation; (d) underperformance of “The Defiant” sectors (IT, Pharma) and rally in “The Rebounders” (Metals); and (e) easing market volatility.
In the current environment, stocks that are likely to outperform in the recovery phase (first three months) are HDFC Bank, Bajaj Finance, IndusInd Bank, Yes Bank, Zee Entertainment, Havells India, United Breweries, Shriram Transport, LIC Housing, Exide, Cholamandalam, Ramco Cement, Tata Global, Supreme Industries, Century Textiles, Ajanta Pharma, Dewan Housing and Reliance Capital.
Sectorwise, metals, and banks are likely to outperform while IT and pharma are likely to underperform.
Large caps outperform during 1-month post correction:
Elara Capital compared the performance of large caps (Nifty50 as a representative) and mid-caps (NSE Midcap as a representative) over the 16 instances of deep market correction and recovery.It is seen that both correction and recovery are relatively steeper for mid-caps relative to large-caps. However, the first leg of recovery (30-day post correction) is led large cap followed by mid-caps.