Global markets are in a tailspin as bears are tightening their grip over the bulls. With growing concerns of a recession, the meteoric rise of the US Dollar Index and a surge in bond yields are sucking liquidity from equity markets. Foreign portfolio investors (FPIs) are scrambling to out their investments out from the much riskier markets and park them in bonds, which are safe haven investments.
Emerging markets like India are bearing the brunt of the FPI pullout as the US Federal Reserve continues with its aggressive stance of monetary tightening to control inflation which came in at 8.3 percent for the 12 months to August.
With the consistent selling pressure, investors have seen nearly Rs 17 lakh crore of wealth eroded in the last 10 days even as the total BSE market capitalisation tumbled from Rs 286.71 lakh crore to Rs 270.5 lakh crore at the time of writing.
Much of the wealth erosion was seen in the last four days, with more than Rs 14 lakh crore of wealth destroyed in four consecutive sessions (September 21-26).
With so much noise around the global macro headwinds, volatility can’t be ruled out with what we are witnessing in the markets currently.
In the current scenario when there is negativity all around, experts suggest that markets are in an ‘oversold’ territory but add that there are certain sectors that seem to have bottomed out and can see a pullback. Moreover, over the medium term, the earnings growth story remains intact. Therefore, it could actually be the right time for quality stock picking.
Here’s a look at some of these sectors and stocks.
Information technology (IT)
The NSE IT index has been on a downtrend for quite a while now and has been consistently underperforming benchmarks. This is despite the strong commentary about demand by the management of most major IT companies.
“Information technology is the most oversold sector in our assessment,” said Vikas Gupta, CEO and investment strategist, OmniScience Capital. The sector is riding on a robust, multi-decadal, secular growth vector—digital transformation. “This is a multi-trillion-dollar opportunity and Indian IT stocks providing services to US companies undergoing digital transformation have growth visibility for a long period of time and can easily ride through any recessionary period,” Gupta added.
From the technical point of view, the IT sector topped out in January 2022 and has been correcting for the past nine months. “The correction in the IT index has halted around 26,200 levels which is very close to the 40-month exponential moving average (EMA) of 25,550,” said Jatin Gedia, technical research analyst, capital market strategy, Sharekhan by BNP Paribas. Considering the prolonged period of correction and prices reaching crucial long-term support levels, a pullback appears highly probable. On the upside, Gedia expects the IT index to target levels of 30,500 which also coincides with 200-day EMA and the previous swing high. He sees bullish implications in Infosys Ltd and Coforge Ltd.
However, Nishit Master, portfolio manager, Axis Securities PMS, holds a contrarian view about the sector and it will continue to underperform. “IT valuations, even after the recent correction, are higher than their long-term averages and, with the economies of the US and Europe slowing down, we expect the demand environment for IT services to weaken going forward,” Master added.
Pharmaceuticals & healthcare
Experts suggest that after the outperformance witnessed in the pharma sector during the pandemic, the sector has been underperforming and has delivered negative returns of 11 percent over the last 12 months.
“After underperforming in the previous year, the pharmaceutical sector appears to be on track to perform well over the next five years,” said Raghvendra Nath, managing director, Ladderup Wealth Management.
Technically, the sector is hovering near its support levels and has witnessed some buying at 12,000–11,900 levels. “We expect the NSE pharma index to hold on to this support area and expect a pullback till the 13,100–13,200 zone where the previous swing high and weekly upper Bollinger band is placed,” said Gedia.
The hospitals sector is also likely to be in focus as a continued rise in lifestyle-related diseases and higher awareness of chronic illness will be the key growth drivers. “This is one sector which has gained momentum in COVID times and with expanded infrastructure and higher budget allocation, the sector looks good,” said Raj Vyas, investment analyst at Teji Mandi.
From the pharma pack, Cipla Ltd and Granules India Ltd are bucking the downtrend and are outperforming among peers. “Both these stocks are trading above their respective 200-day moving averages (DMAs) and while the index was falling, these stocks entered a consolidation and thus prevented price correction,” said Gedia. So, in case of an upside in the pharma sector, these stocks are likely to lead on the upside.
The banking sector appears to be in a sweet spot, as according to the latest Reserve Bank of India data, credit growth is back and after 8-9 years, double-digit growth is seen for the sector. Overall, credit growth was around 15.5 percent, the best since November 2013.
“The deposit momentum too has started to pick up and this augurs well for large banks that have been capturing market share from the mid-sized and small banks,” said Vyas. Banks are likely to expand from here on out owing to the economic recovery, increased capex and retail credit push. Also, with the rise in interest rates, margins and earnings for the sector are set to rise.
Power & utilities
Experts believe that the power and utilities sector has also witnessed lot of selling and are in the oversold category. These are defensive sectors which tend to weather crises with ease compared to growth sectors.
“The focus should be on strong, high-dividend-paying companies in these sectors,” said Gupta. Several power generation companies have numerous projects which are in the pipeline and on the verge of being commissioned. Once these come online, revenues and profitability of these companies will increase significantly.
Apart from the above-mentioned ones, experts are also positive on sectors that are strong domestic plays like defence, auto and FMCG. Defence is likely to ride on the ‘Make in India’ push by the Indian government while auto is witnessing the easing of the semiconductor crisis, fall in commodity prices and continued strong domestic demand. Experts favour M&M, Tata Motors and Maruti Suzuki from this pack. A revival in rural demand after a largely normal monsoon as well as the festival season is likely to play out well for FMCG stocks.Disclaimer: The views and investment tips of investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.