Markets have cooled off by 10 percent from their all-time highs in October, losing 3.58 percent in the week ended February 25. The broader markets have corrected even more – by 18 percent.
The expensive valuations that Indian stocks commanded have come down to a slightly more comfortable level. Experts said the correction is far from over and depending on how the geo-political situation unfolds, there may still be more volatile sessions that can rock the markets. They are confident the markets will rebound strongly, as they have in the past after getting rocked by such incidents. However, they are conceptual about how the markets may react in the near term.
“The present macroeconomic developments are leading to volatility in all major asset classes, including equity, debt, currency, and gold. Volatility is here to stay for some time before it concludes in a concrete direction,” said Neeraj Chadawar, head – quantitative equity research, at Axis Securities.
Outlook on equities
“The current situation has many layers of geo-political issues and we need to observe how they play out and the impact on oil and gas prices, to name a few, which make it too early to comment on the markets,” said Satish Ramanathan , MD of JM Financial Asset Management.
Experts are confident about the India growth story and suggest the fundamentals are still intact. Harish Krishnan, equity fund manager at Kotak Mahindra Asset Management Co, said, “This event will have limited impact on the earnings profile of Indian companies from the medium to long-term point of view and with valuations having moderated a bit, we will use this as an opportunity to allocate to equities.”
Earnings momentum is a critical factor for market performance, though it has been strong in the past few quarters and in line with expectations for the current quarter.
“We hold our long-term view on the market as the favorable structure is emerging due to an increase in capex spending, which will enable banks to improve credit growth. The overall boost in the budget expenditure will help deliver broad-based growth in FY23,” said Chadawar of Axis.
He maintains a Nifty 50 target of 20,200 for December 2022 as the cumulative and rolling net profit of the NSE 500 universe for the past four quarters has touched an all-time high (crossed Rs 9 lakh crore in Q3 of FY22).
Trideep Bhattacharya, CIO-equities, at Edelweiss Mutual Fund, draws comfort from the fact that the equity markets have had a long history of digesting such geo-political events within months and focusing on fundamentals thereafter.
“In the first half of CY22, the markets will digest the pace of policy normalisation, geo-political events, stickiness of inflation along with the Omicron issue and hence, would expect it to be volatile,” Bhattacharya said. In the second half, he expects the markets to respond to earnings direction as the economic recovery unfolds.
Advice for investors
Once the current situation stabilizes, the market is expected to re-focus on earlier key events such as inflation and the central bank’s view on rate hikes.
“On the possibility of a cut in global growth, the US Fed may slow the pace of rate hiking, but we cannot rule out the possibility of an aggressive stance by the US Fed if it foresees a sharper pick-up in inflation,” said Chadawar.
The wider view is that the focus of central banks will be on controlling inflationary effects rather than growth effects.
“In the given scenario, investors should focus on asset allocation and use this volatility to build long-term positions in quality large and mid-cap stocks as they become attractive after the recent correction and provide a good entry point,” added Chadawar.
Krishnan of Kotak also advised investors to follow asset allocation.
“For those investors who are under-allocated to equities, such episodes of volatility give them an avenue to deploy into equities,” Krishnan said.
However, Ramanathan from JM Financial had a word of caution. He would rather wait to understand the new equilibrium before advising investment.
“This is not a normal market correction, in that sense, and hence, as I mentioned earlier, it is too early to call an end to market volatility,” he said.
With Russia and Ukraine moving for talks, the conflict is unlikely to morph into a full-scale, multi-country war, but this may not be enough to curb the current market volatility.
Bhattacharya of Edelweiss advised investors to “use the volatility in H1-22 to increase their exposure in the equity markets in a gradual manner with a positive outlook over the next 2-3 year perspective.”
The sharp increase in fuel prices due to the current crisis and a recurrence of Covid-19 are the prominent risks that the markets face in the near term.
“The impact of inflation on household budgets due to rising fuel and food prices may dampen consumption to some extent,” said Ramanathan of JM Financial. He is positive on India’s export-oriented sectors – IT, pharma/chemicals, textiles and auto ancillaries and expects services to recover on the back of opening up of the economy after the pandemic.
Commodities will be the biggest gainers, given the backdrop of the Russia-Ukraine crisis.
“As long as the Russia-Ukraine heat continues, commodities are expected to be the dominating theme versus consumption,” said Chadawar. He expects a sharp reversal in bank, financial service and insurance (BFSI) stocks, which were impacted by the present volatility, as the outlook for the sector has improved significantly over the past few quarters.
The global shift to the ‘China-plus one’ strategy – to diversify business into other countries – will benefit export-focused sectors, concurred Krishnan from Kotak and Bhattacharya from Edelweiss.
“From the longer term point of view, we are constructive on the investment cycle in India. Capital goods, manufacturing, auto & auto ancillaries, cement and banks are sectors that we are positive on across our funds,” Krishnan said.
Bhattacharya employs a theme-based approach, which makes him positive about private sector investment demand, beneficiaries of government growth schemes and consumer companies.
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