The current correction and beaten down prices of mid & small caps offers good time window to accumulate stocks from a 2 year perspective.
There are concerns and headwinds facing Indian Equities, which were being reflected in the broader market but were not visible in the Nifty50 Index due to concentrated rally in a handful of stocks.
Post budget, FIIs have turned aggressive sellers in the market, which is leading to a higher correction in the concentrated stocks keeping Nifty50 at elevated levels. The major pain point for the market is the serious slowdown in various sectors, which seemed cyclical at the start but has extended beyond expectations. Consumption-led growth and high government spending could be running out of steam and we are not seeing any revival in private investment.
Most of the manufacturing industries, led by automobiles and industrial equipment, have been facing slowdown since the start of CY19. There is still no sign of revival in most of the monthly indicators and volume data we monitor.
We are hoping that activity on the ground should pick up closer to the festival season. Thanks to prompt RBI action, the liquidity situation has moved from deficit to surplus. The consistent reduction in repo rates with the expectation of further rate cuts in the coming months should help improve demand in the coming months.
In spite of global geo-political tensions and talks of a trade war, three factors have favoured Indian markets—a stable currency, low crude prices and lower bond yields. However, the major disappointment staring the market is potential cut in earnings forecast that could increase the forward valuations of the Indian market.
As we head into the second phase of earnings season, we could see hard-core manufacturing companies report poor results. As a house, we are expecting Nifty earnings to increase by just 1.3 percent in Q1FY20 on a YoY basis but if we exclude the banking sector then earnings could de-grow by 6-7 percent. We could see 4-5 percent cut in the one year forward Nifty50 earnings and similar adjustment is warranted in the Index.
At this juncture, we don’t expect Nifty50 to fall below the 11,000 mark, unless the slowdown persists and sustains throughout the forthcoming festival season. The risk-reward ratio turns favourable closer to the 11,000 mark.
If government action leads to improvement in industrial activity and things start improving in the next two-three months, then we could see improvement in monthly data points from Q3-FY20 (i.e. around the festival season). Hence, we can expect a broader market uptick from Q3FY20 onwards.
For Nifty50 to cross fresh highs, we need market-friendly measures on the taxation front coupled with a revival in earnings, which will be a function of how fast things improve on the ground. If bond yields sustain in the 6-6.5 percent range then it will allow equity valuations to sustain at higher levels.
The current correction and beaten down prices of mid & small caps offer a good time window to accumulate stocks from a 2-year perspective. We advise investors to take advantage of the sharp correction in mid and small caps to accumulate them in the next few months.
(The author is Head of Fundamental Research at Kotak Securities.)Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.