Indian indices have been in the red in 2023 YTD with the benchmark Nifty down over 6 percent driven by sticky inflationary numbers, a hawkish stance by the US Federal Reserve, continuous foreign portfolio investor selling, and muted Q3FY23 earning reports.
However, a recent report by wealthtech platform Fisdom Research suggested that the recent correction in the Indian market offers a good entry point for investors for long-term opportunities.
"Overall, while India's growth potential and strong economic fundamentals are attractive for investors, it is important to assess the market's valuation before making investment decisions. A high valuation could result in limited upside potential and increased downside risk, making it crucial for investors to diversify their portfolio and adopt a long-term investment strategy," it advised.
Investors have witnessed several instances in the past where the market has yielded significant returns for those who accumulated stocks during times of extreme fear, highlighted the report, adding that while such opportunities can be tempting, it is crucial to stick to the core asset allocation framework to avoid deviating from the long-term investment goals.
Not just India, market sentiment in the US has also been impacted by concerns about prolonged monetary tightening in the country and geopolitical pressures, noted the report. It pointed out that macroeconomic indicators in the US are pointing towards a possible further slowdown in the near term.
However, European indices have outperformed other indices, largely driven by strong corporate earnings, an increase in foreign institutional flows, and timely monetary policy actions taken by central banks. Meanwhile, Chinese indices are also positive, with the country reopening fully and economic activity picking up to near pre-pandemic levels, it observed.
Going ahead, the volatility is likely to persist in Indian indices driven by resumed monetary tightening and concerns over rising prices. It further revealed that historical data suggests that large-cap companies are more attractive in an inflation-challenged environment, as they have been better at sustaining margins than small and midcaps.
"Therefore, given the prevailing liquidity situation in the market and the steady correction in some large-cap companies, we recommend that investors adopt a multi-cap approach with a large-cap bias. Portfolios can be tilted towards midcaps primarily and small caps secondarily in line with increasing ability and willingness to accept volatility," advised Fisdom.
Amid the current inflationary and rising interest rate scenario, it pointed out that fast-moving consumer goods (FMCG) and capital goods sectors have been delivering positive returns on a month-on-month (MoM) basis. Moreover, these two sectors have also shown remarkable resilience on a year-to-date (YTD) basis, it noted.
"Record-breaking Capex announcements in the budget, normalization of semiconductor supply, and healthy guidance by leading capital goods companies in regard to inflation and growth created optimism. Smart money also moved into FMCG, a defensive sector, as volatility increased," stated Fisdom.
In the near term, it expects these sectors to continue performing well, and bottom-up stock picking will play a crucial role. On the other hand, the power, metal, and oil gas sectors have corrected significantly since the beginning of 2023 due to a lack of robust growth in Q3FY23, and even earnings have been downgraded for these sectors, it cautioned.
"Considering the current low growth and high inflationary environment, sectors with good earning visibility and strong macro push, such as IT, banking, automobile, capital goods, and FMCG, are expected to do well. It is important to note that sector performance can be influenced by various factors such as global trends, government policies, and corporate earnings. Investors should keep a watchful eye on market movements and invest accordingly," recommended Fisdom.
It also highlighted that Foreign Portfolio Investors (FPIs) have made net purchases of ₹7,000 crore in sectors such as capital goods, services, IT, healthcare, and automobiles while selling ₹11,000 crore worth of stocks in sectors like oil and gas, power, metals, mining, and consumer discretionary.
As per Fisdom, the divergence in earnings has reflected in FPI flows, with sectors like automobiles, capital goods, IT, and healthcare experiencing robust growth, while metals and oil and gas have seen negative PAT growth. It believes that this trend is likely to continue in the near term.
Value vs growth
In recent years, it noted that the MSCI Value Index has outperformed the Growth Index, signaling a shift in investor preferences toward value-oriented stocks. This trend has been driven by several factors, including the changing economic landscape, rising interest rates, and a growing preference for defensive stocks with stable earnings and dividends, it said.
Historically, the report informed that growth stocks have been the darlings of the market, with investors willing to pay a premium for the promise of future growth. However, the tide has turned in recent years, and value investing has taken the lead, it noted.
"While both value and growth investing have their merits, the recent outperformance of the MSCI Value Index suggests that investors are increasingly favoring value-oriented stocks.
However, it is important to note that market conditions can change rapidly, and a balanced portfolio that combines both growth and value stocks may be better positioned to weather volatility and generate long-term returns," suggested Fisdom.
At the heart of any successful investment strategy lies asset allocation. These key principles will be instrumental in generating outperformance in 2023 and beyond, stated the report. It recommends investors to focus on these strategies and proactively take advantage of market volatility to build long-term positions in high-quality companies.
While maintaining an 'Overweight' stance on equity, it noted that it's crucial to review your portfolio regularly and take advantage of dips in the market to increase your allocation to equity if it's under-allocated.
For equity, it advised remaining selectively positive. Heightened volatility may sustain unless external dynamics change positively, it said, recommending investors to stay patient and focus on the target allocation.