Kotak Institutional Equities warns against using investor flows to track market bottom

The headline Nifty 50 has corrected 16% from its all-time highs, while small and midcaps are down 21-25% from peaks.

Brokerage firm Kotak Institutional Equities came down heavily on investors tracking retail inflows as an indicator to predict a market bottom. "Flows have proven (again) to be absolutely useless in figuring out the peak of the market and the subsequent correction, and they will prove useless in predicting the market bottom," the firm wrote in its latest report.

The brokerage highlighted a few fundamental facts about the market remain underappreciated by investors when tracking market trajectory. "There is no new money in the secondary market as for every buyer, there is a seller at all price levels. Investor actions, whether buying (inflows) or selling (outflows), are driven by expectations of returns. And ultimately, a stock's price is determined as the clearing price, reflecting the collective expectations of all market participants," the brokerage pointed.

As for Kotak's own projection, the firm still continues to hold an extremely bearish stance on the market, failing to find value across most pockets despite the sharp correction across sectors and
stocks.

"Most segments of the market appear expensive, either on an absolute basis or relative to historical trends," KIE wrote.

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As for consumption stocks, Kotak sees valuations as full-to-frothy valuations, despite short-term growth challenges and medium-term disruption risks. For investment and outsourcing stocks prices sit at fair-to-full valuations, with the latter facing concerns around short-term demand in IT services and market risks in pharmaceuticals.

The firm chalked out only two sectors--banks and NBFCs as the ones with reasonable valuations. In addition, the brokerage also warned against looking at valuations of the headline indices as a marker for overall market valuations.

"Headline market valuations are misleading, given the wide disparity in valuations and a large share of profits of low P/E sectors," KIE said.

On the other hand, the firm's bearishness ran the highest for 'narrative' stocks, with the brokerage seeing minimal signs of rebound in the space. "Many such stocks are trading
at unfathomable valuations despite the 30-50 percent correction in their stock prices in the past few months," the brokerage stated.

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