Analysts struggle to find investment-worthy themes in the current market

Sectorally, the realty, auto, healthcare and capital goods indices are the top performers so far this fiscal, while the benchmark S&P BSE Sensex has gained around 7 per cent.

The sharp rally in the markets thus far in fiscal 2023-24 (FY24) has left analysts struggling to find investment-worthy themes. The S&P BSE Sensex has surged nearly 7 per cent thus far in FY24 and hit a fresh 52-week high of 63,601.71 levels on June 22, mostly led by foreign institutional (FII) flows.

“The Indian market has seen a broad rally in the past few months but headline indices have seen more modest performance. We are not very clear about the reasons for the rally and the divergent performance and struggle to find ideas in the consumption, investment and outsourcing sectors after the sharp run-up in several of our favored sectors and stocks in the past two months,” wrote Sanjeev Prasad, co-head, Kotak Institutional Equities, in a recent co-authored note with Anindya Bhowmik and Sunita Baldawa.

That said, Prasad believes that the banking financial services and insurance (BFSI) is the only sector that offers value at the current juncture, although insurance stocks, too, have rallied in the past few days.

At the bourses, the BSE Bankex, a gauge of performance of banking stocks on the BSE, has outperformed the benchmark S&P BSE Sensex with a rally of over 7 per cent thus far in FY24. Benchmark indexes of realty, auto, healthcare and capital goods sectors, meanwhile, have been the top performers that have moved up 15 per cent to 32 per cent during this period, ACE Equity data shows.
 

 

An important feature of the rally that took the S&P BSE Sensex to a record 52-week high recently, according to V K Vijayakumar, chief investment strategist at Geojit Financial Services, was its weak structure and lack of enthusiastic investor participation.

“The market lacks momentum to take it convincingly to new highs. There is no support from the mother market US, either. The S&P rally of 13.6 per cent year-to-date (YTD) was led by just 10 tech stocks. Such concentrated rallies are unlikely to last long. In India, even though the rally is more broad-based, there is no valuation support to take the market much higher. Investors should wait-and-watch for clearer direction," Vijayakumar said.

Meanwhile, the rally in the mid-and small-caps has been sharper. While the S&P BSE Smallcap index has surged 19.5 per cent thus far in FY24, the S&P BSE Midcap index has moved up 17.5 per cent during this period.

Prasad of Kotak Institutional Equities remains cautious on these two market segments as well, and believes that India’s continued weak consumption demand should be negative for smaller companies, while the improved macro in the form of lower inflation and current account deficit (CAD) should have been more favorable for performance of large-caps based on better top-down view of India among foreign investors.

“We do not see any particular reason for the excitement in mid-and small-cap stocks. We can perhaps understand the re-rating seen in certain sectors such as BFSI (smaller private banks), healthcare services (hospitals) and real estate given their somewhat reasonable valuations before the recent rally and strong outlook. However, we struggle to understand the rally in smaller consumption and IT services stocks given continued weak domestic demand (valid for consumption sectors) and weakening global (valid for IT services) demand,” Prasad wrote.

As a strategy, G Chokkalingam, founder and head of research at Equinomics Research & Advisory suggests investors remain in a wait-and-watch mode and hold on to their cash positions. Monsoon, June 2023 quarter results of India Inc and policies of the global central banks are among his key monitorables, which he believes will be trend deciders for the market in the short-to-medium term.

“If all goes well, the domestic market is set for record high levels by November 2023,” he said.