Tech, financials: Silver lining in times of stock market turbulence

NIfty back at June 8 levels but index components see a change in complexion

The market is back to the levels seen in early June after a 10-month roller coaster ride. While a dozen index components have remained largely unchanged since June 4, the rest of the stocks have undergone significant price movements over the past eight months.

 

Information technology (IT) and financials have weathered the market storm better than others. Notable performers include Wipro, which has seen a 33 per cent increase, Divi’s Laboratories has gained 32 per cent, while Bajaj Finance has jumped 30 per cent since June 4, when results of the General Election were announced.

 

The auto and energy sectors have suffered significantly. Among the worst performers are Hero MotoCorp (down 28 per cent), Adani Enterprises (28 per cent), and Tata Motors (27 per cent).

 

On June 4, the Nifty 50 index had dropped 1,379 points, or 6 per cent, to close at 21,885 after Prime Minister Narendra Modi's Bharatiya Janata Party (BJP) struggled to reach the halfway mark of 272 seats.

 

In the next five months, however, the index surged by 20 per cent to reach record highs of 26,216 on September 26 as the BJP managed to stitch a strong coalition. Since then, the Nifty has declined by almost 15 per cent, driven by relentless selling by foreign portfolio investors (FPIs) and slowing corporate earnings growth. 

 

“In India, the main attraction was very high earnings growth, which has now come under question. There’s a growing sentiment that this market needs lower multiples. At the same time, US bond yields started increasing, prompting FPIs to pull money from emerging markets. This added to the malaise in Indian equities,” Herald Van Der Linde, Head — Equity Strategy, Asia-Pacific, HSBC told Business Standard last week.

 

Van der Linde said the focus should be on growth stories or sectors that benefit from the current macro environment.

 

“One is tech, which benefits from a weak currency. The recent earnings season also showed an improving growth outlook in the US. Within the consumer sector, we prefer discretionary over staples due to more attractive valuations. Some automotive companies are targeting high-growth sectors overseas, despite weak domestic demand. Hospitals is another sector we like because of their long-term structural growth story. We also favour private banks, where valuations are attractive and could benefit from increased liquidity,” he said.

 

A recent report by Motilal Oswal showed that even as the market has come off sharply from the highs, two-thirds of sectoral indices still trade at a premium to their 10-year average price-to-earnings (P/E) multiples.

 

Among the sectors commanding the highest premiums are infrastructure, utilities, and consumer durables. Conversely, media, banks, and auto companies are trading at a discount to their historical averages.

 

Kotak Institutional Equities favours large private banks, non-banking financial companies (NBFCs), life insurance firms, residential real estate, hotels, and the airlines/hospitality sectors. 

The brokerage remains cautious on consumer staples, discretionary stocks, and the oil and gas, and chemicals sectors.