'Expect stock market to be subdued in near-term'

Interview, Vinod Nair, head of research at Geojit Securities


Benchmark indices gained on Friday, with the broader BSE Sensex gaining around 635 points or 1 per cent to close at 63,872.80 amid bargain hunting by investors post the recent slump. Friday's rally came after a six-day losing streak and the index was still down 2.50 per cent for the week. On Thursday alone, the Sensex had tumbled 1.4 per cent. What is behind the recent sell-off and what is the near-term outlook? Vinod Nair, head of research at Geojit Securities, shares his thoughts with THE WEEK.

Markets saw a sharp correction this week. Why? What are investors worried about? 

The primary concern lies in the market's anticipation of a further slowdown in the economy in upcoming quarters. The current economic landscape stands in contrast to the stock market's trajectory, influenced by heightened interest rates and geopolitical uncertainties. Despite the optimistic outlook of the second quarter results recently disclosed in India till date, even satisfactory performance fails to sustain market enthusiasm. Because the risk of future downgrades in earnings and valuation is arising in the global world, leading to FIIs selling. The economy was under stress of imbalances like high inflation, bond yields, war, and supply constraints for a long time; but the stock market was trading at a high valuation, which may not sustain in the short to medium term. For example, during the year, the MSCI World Index was trading above the long-term one-year average, at P/E of 17.5x, while the dollar bond yield was trading at a decade-high of five per cent. It is a dichotomy. As the interest rate is expected to stay high, in-stroke to the hawkish central bank view, an economic slowdown and a correction in earnings forecasts and valuations are warranted.

Do you see further correction ahead, or will the market stabilise post the recent selling? 

Given the challenging global stock market conditions, we anticipate a subdued domestic trend, largely due to the selling activities of FIIs. However, we don’t expect a deep correction in India due to the long-term decoupling ability of the domestic economy compared to the world, high SIP inflows, a change in domestic investment pattern, and high cash position of domestic institutions. 

Notably, despite the looming global recession, India's earnings growth is expected to maintain its strength in FY24. For instance, the Profit After Tax (PAT) of companies in the Nifty50 index saw a 30 per cent growth in the first quarter of FY24, with an estimated 22 per cent growth in the second quarter. The forecast for the full fiscal year 2024 indicates a growth of approximately 18-20 per cent, highlighting the resilient foundation of the Indian economy. We presume that the downside is protected; hence, it is advisable to adopt an accumulation strategy for investments in India, at this time.

Midcaps and smallcaps had seen a strong rally this year. Post this week's correction, should one buy on dips or be cautious and reduce exposure to mid and smallcaps? 

In the short to medium term, large caps are well positioned to perform better compared to mid and small caps, owing to their more favorable peer valuation and stable business outlook, especially in the midst of global uncertainties. We are positioned in the mid and small category on a long-term basis. And at present, we recommend a stock-to-sector specific approach, emphasizing on the quality of business, management, and valuation. Our suggestion is to employ a bottom-to-top approach for selecting stocks within this category. For retail investors, we advise a strategy of accumulating over the next three to six months.

Based on the earnings announcements so far for the September quarter, what is your assessment on overall corporate health and outlook? 

The expectation for Q2 is brightened, and the actual overall result is marginally above the buoyant estimate. The banking sector has notably performed well, while the IT and FMCG sectors have shown more modest figures. There is a perceived risk of downgrades in IT, whereas FMCG has a mixed improvement due to a fall in future inflation but moderate volume growth. Both the cement and metal sectors have delivered decent results thus far.

Where do you see pockets of opportunities now? Would you focus on sectors or specific stocks across sectors?

For the short to medium term, large-cap stocks are the preferred choice. Generally, a stock-to-sector-specific pick is the way forward. The current strategy revolves around investing in domestic-focused stocks and sectors, leveraging stable demand leading to insulated revenue growth. At the same time, profitability is driven by the decrease in external inflation risks enhancing operating profitability.

Sectors such as FMCG, agriculture, staples, consumption, fertilizers, as well as core areas like infrastructure, housing, and sugar, exemplify this theme. Additionally, there are also emerging opportunities in the chemicals and pharma sectors, post the ongoing consolidation. Raw material cost risk has diminished and long-term demand horizon from the external sector is steady. Long-term investors with a horizon of one to three years are advised to consider an accumulation strategy in the IT sector, as Indian IT companies' robust deal wins indicate a steady business outlook propelled by an emphasis on digitalization, security, AI, IoT, and cloud (5G/6G).

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