The 5 per cent correction past week and the frontline indices almost retracting to their 2014-15 levels have resulted in some temptation creeping into investors’ mind. They are thinking: Is now the time to bottom fish large-cap stocks? But no, the grand stock market clearance sale may not offer the best price yet, for one to turn optimistic on the markets and more so on India’s blue-chip stocks.
“The Indian markets are reacting to what’s happening globally, and while some stocks look compelling after the correction, it is still early to predict if equities have ebbed or there could be more fall,” cautions Sunil Singhania, founder, Abakkus Asset Management. For him, it’s critical to see some more clarity on where the market is headed to before he can go all out on stocks.
At 16.9 times 12-month trailing price-earnings (PE); a correction of 36 per cent since November 2019’s valuation high of 26.3 times, makes the market look most appealing in the last six years. But here’s the catch. Global economies, including India, may be headed for another wave of recession and if that be the case, the Nifty trades significantly higher compared to the global financial crisis (GFC) levels in 2008-09.
What also complicates the matter is that when about a decade ago, the markets slipped into the recessionary phase caused by the meltdown of large financial institutions, abundant injection of liquidity was a good enough solution. But, this time around problems are different. “In 2008, ahead of the market crash, the economy was at its peak. In the current correction, several economic factors have been depressed for some time,” says Mahesh Patil, chief investment officer-Equity, Aditya Birla Sun Life Mutual Fund. Also, as Mihir Vora, director and chief investment officer, Max Life Insurance, points out, the GFC was a case of financial sector stress impacting the real economy in the West. “Today, a forced economic shutdown is impacting the financial markets. A series of events and uncertainties lingering for long and sentimentally, things are different from the GFC times.”
Compiled by BS Researcu Bureau
This is why, experts feel, India Inc’s earnings for the two quarters starting March 2020 may come under severe pressure. When seen in this context, valuations of stocks, such as Tata Consultancy Services, Titan, Asian Paints, Dabur, Britannia, and Havells, despite the correction, remain expensive for investors considering the growing uncertainties on the demand and profit fronts. While valuations of HDFC, HDFC Bank, L&T, and Reliance Industries are near-about their GFC levels, they haven’t become completely affordable just yet.
Names such as JSW Steel, Adani Ports, Mahindra and Mahindra, Hindalco and Motherson Sumi faced with extreme demand and supply constraints, where growth has been under severe pressure for two–three quarters, are some that have become cheaper now. That said, ITC, Indian Oil, ONGC, Bharat Petroleum, Bajaj Auto, Cipla, and Aurobindo Pharma are among stocks trading below their GFC valuation levels.
This is why domestic fund managers advise investors not to take their eyes off equities in the current downturn. “The market may bottom out one day, but all stocks will not bottom out on the same day as the overall indices. Investors may want to keep a list of stocks ready,” says Vora. In addition, Sampath Reddy, chief investment officer, Bajaj Allianz Life Insurance, says the prudent thing is to at least get started and not to panic and sell-off. “Historical data has shown that investments made in challenging/volatile times have generally been quite rewarding for investors over the medium to long term,” he adds.
Therefore, while the large-cap stocks may not have turned entirely attractive, depending on the individual risk profile, the current market conditions offer an opportunity to accumulate some of them, though not in large quantities, just yet.