Risk-reward balance poor despite the recent correction, says report

The risk-reward balance for the Indian market is poor despite the recent correction, said Kotak Institutional Equities in a note.

 

“Most stocks are quite overvalued, earnings upgrades look difficult given generous assumptions, and global bond yields may hold up ‘higher-for-longer’. The reaction of hitherto euphoric retail investors, the bedrock of the market, will be interesting to see,” the note said.

 

The note said the recent broad-based correction in the Indian market does not change its cautious outlook, given full-to-frothy valuations in most parts of the market and low scope for earnings upgrades given fairly aggressive earnings, profitability and volume assumptions across sectors. And uncertain global macro-environment and likely higher-for-longer bond yields and interest rates.

 

“In our view, the rich valuations of most parts of the market simply reflect the price-agnostic buying behaviour of non-institutional investors and 'forced' buying of domestic institutional investors for the past 2-3 years. The lack of fear and the focus on greed (of returns) among retail investors have pushed valuations to absurd levels in several cases," the note said.

 

The brokerage said investors were willing to give any multiple for stocks irrespective of the business models and fundamentals, use exotic valuation methodologies and multiples, and believe in any random narrative about sectors and stocks.

 

“Retail investors may show some of their usual chutzpah and buy stocks aggressively, buying on dips has been the common mantra so far, but that would be comical,” the note said.

 

The brokerage said many “narrative” stocks have a long way to go based on the true value of such companies.

 

“Many of them have corrected sharply in the past 3-6 months, but most are trading at absolutely ludicrous valuations,” the note said.

 

Kotak Institutional Equities said largecap, stocks may hold up better in the next few months, while midcap, smallcap, and “narrative” stocks will see a further severe correction if the alignment to fundamentals and value were to continue.   

Disclosure: Entities controlled by the Kotak family have a significant holding in Business Standard Pvt Ltd