Stocks vulnerable due to tepid economic recovery; Nifty fair value close to 10,300: Edelweiss

The Indian market has rallied by over 50 percent from the March lows but the recent rally has made valuations slightly expensive in the absence of any meaningful recovery in earnings, which leaves little room on the upside, Sahil Kapoor, Chief Market Strategist, Edelweiss Professional Investor Research said in a note.

Valuations remain the bedrock of looking at evolving macro data and subsequent action on stocks, bonds and currencies. The recent phase of overheated stock prices meant that markets were discounting a quicker move to normalcy than the data suggested.

“We recommend to err on the side of optimism when valuations are attractive, and that phase is likely to unfold in the current round of correction. The message to investors is to ‘Be Agile, Be Ready’, he said.

Kapoor in the note said that Indian equity markets have been trading at cyclically expensive valuations reflecting a quick road to normalcy. At the recent swing high of 11,800 Nifty traded at a PE of more than 19.2 times of FY22 EPS.

That leaves little room for gains which we have continually highlighted in our high-frequency data sets and communication.

“As a barometer of broader markets, we believe Nifty (LTP 11,220) would look attractive once the recent wave of correction takes it closer to its average valuation of 16.5 times of FY22 which would be in the range of 10,000 to 10,300,” added the note.
Stimulus, Normalcy To Aid Small & Midcaps (SMID):

More opportunities are likely to emerge in the small and mid (SMID) cap space which are more attuned to the trends in the broader economy. The recent rally in SMID may see pressure from slowing high-frequency data.

Our conjecture is that SMID will continue to reflect changes in high-frequency data as the ability of market participants to decipher the way to normalcy remains limited.

Investors should exercise caution and should refrain from entering markets when the margin of safety is low, like the recent instance of rich valuations as measured by Nifty PE of ~19.2 times. However, corrections should be used and ‘Buy the dip’ will be the go-to strategy.

“We believe the worst is over for broader economy and markets, but deep corrections and phases of economic weakness are the minefields to maneuver,” added the note.

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