Market balanced despite headwinds, says Prabhudas Lilladher. Here are its stock picks

Analysts believe benchmark Nifty is trading at comfortable valuations, lending a strong picture for the near-term.

The domestic equity markets have remained evenly balanced despite headwinds emanating from firm US interest rates, El Nino-related weather conditions' impact on crop prices, volatile crude and geopolitical uncertainty, Prabhudas Lilladher analysts have said. The Nifty is trading at comfortable valuations, lending a strong picture for the near term, they said.

“The Nifty is not in a bubble zone as it is trading around 17.2 percent discount of 10-year average, which provides comfort. Against this scenario, we remain positive on auto, especially passenger vehicles, banking names, capital goods, hospitals, and discretionary spaces. Agro-chemicals and specialty chemicals, however, indicate a tepid outlook,” the brokerage firm said in a recent note

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In the past month, equity benchmarks the Sensex and the Nifty 50 have gained 1 percent and 2 percent, respectively.

The outcome of the state election, foreign flows, commodity prices and trade deficit balance would dictate market momentum in the medium to long term, the report said.

Poll season: Consumption, auto themes to gain traction

The assembly elections in five key states - Chhattisgarh, Mizoram, Rajasthan, Telangana, and Madhya Pradesh - are pivotal to setting the stage for the 2024 Lok Sabha elections.

The assembly elections have fuelled expectations of fiscal stimulus targeting the rural sector, which could give a much-needed boost to rural consumption.

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“Industries like consumer goods and automobiles anticipate positive impacts on sales, riding on increased government spending and election-related demand,” Prabhudas Lilladher analysts said.

While the brokerage firm expects state elections to cause short-term market volatility, the outcome of 2024 general elections and global interest trends remain critical factors for equity markets to watch.

El Nino impact: Palm oil saving grace, sugar prices to pinch

Dispersion of rainfall was poor in India in 2023 as seven subdivisions saw deficient rainfall and in five states the deficit was in double digits, the report said.

This spatial distribution of rainfall would impact crop outputs and their prices.

In the case of sugar, prices are at multi-year highs – up over 17 percent since April 2023 amid lower output.

Wheat prices, too, were up 23 percent post-harvest season despite the auction sale by the government of India. Spices, too, have seen a sharp rally in the past six months.

The saving grace has been palm oil, as Indonesia's crop was normal. However, any shortfall in Malaysian output in January or February can impact the prices of the entire edible oil basket.

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DIIs inflows neutralise FII selling

Although India remains the fastest-growing economy among the large ones, the outlook on foreign institutional investor (FII) flows remained uncertain. So far in November, FIIs have sold equities worth Rs 1,055 crore.

India saw strong FII inflows along with other emerging markets from April 2023 but they peaked in June and turned negative from September.

Analysts said the Nifty exhibited a flattish trend in the past six weeks as strong domestic institutional investor (DII) flows neutralised FII outflows.

“Going ahead, we believe that India heading for state and general elections over the next six-eight months could increase political uncertainty and impact the FII inflows,” the brokerage firm added.

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