Markets have lost over 8 percent in 2022 so far due to a combination of global and local factors and going by the current tailwinds. Despite the recent correction, brokerage house HDFC Securities believes that the end to this phase does not seem to be near in terms of time or value.
It added that cessation of hostilities in Europe and signal from global Central banks that they are done with rate hikes could create the background for bottom formation provided by that time the world is not facing recessionary conditions.
While the Nifty P/E has fallen from the highs of 36.1x in March 2021 to 20.4x currently, 175 stocks out of NSE 500 are on an average 368 percent higher from their March 2020 bottoms while the Nifty is up around 110 percent, showing the downside space for some of these stocks, noted the brokerage. Also given the rising rates in the US, weakening Rupee and global slowdown, some FPIs seem more bearish on India now than in March 2020 Covid times, it said.
Though the FPI selling since October 2021 of around $30.3 bn is still just 4.55 percent of their holding and 14.9 percent of their cumulative inflows till that date, the latest selling spree denotes the downside risk to markets, the brokerage pointed out. It further noted that one also needs to be careful of stocks where FPIs have a large holding even after 8-9 months of sales.
Suggesting strategy amid the current volatility, HDFC Securities said that for investors who are fully invested, this is not a great time as they watch their portfolio values eroding week after week.
"These investors can do a thorough review of their asset allocation and equity portfolio and carry out rebalancing by making necessary changes to the asset classes and equity portfolio. For rebalancing equity portfolio, they can wait for some intermittent bounces. These can be used to raise some cash which can be deployed when the current downtrend comes to an end over the next few months," it advised.
It further added that while doing this, investors may have to take some losses on some stocks that have been bought at higher levels and where the potential for revisiting the earlier highs seems unlikely due to micro or sectoral developments.
However, for investors who are not fully invested or who have raised cash in the recent past by booking profits, these times provide an opportunity to gradually raise the equity portion of their portfolio, said HDFC.
"While shortlisting investable stocks one will have to be careful of not having exposure to sectors or stocks that have been derated due to very high valuations or very high financial forecasts that seem difficult to achieve. Also, stocks that did well due to commodity uprun over the last one odd year need to be examined closely for the sustainability of earnings. Stocks that could see a feeble or elongated recovery also need to be avoided," it advocated.
The brokerage feels that some stocks could underperform over the next few quarters by falling more or rising less whenever the markets start to rise after making a bottom. Such stocks can be bucketed into three buckets, it added.
Let's take a look
1. Stocks that have good growth visibility but are expensive: Capital Goods – ABB; IT – Tata Elxsi; Chemicals – SRF; Cables– Polycab
2. Stocks that have seen their best days and are yet seeing unwinding: Metals - JSW Steel, Vedanta; Pharma – Sun Pharma, Lupin
3. Stocks that are trading at fairly steep valuations but face an uncertain earnings visibility given the cost inflation and affected demand: Consumer staples – HUL, Nestle, Britannia. Investors may either stay away from bottom fishing in these or exit them fully or partly on rises.
In the report, it suggests stocks including Bandhan Bank, Coal India, Coromandel International, DLF, Maruti Suzuki, SAIL and Tech Mahindra for high-risk investors. Meanwhile, for medium-risk investors, the brokerage prefers Bharti Airtel, Cipla, ICRA, ITC, M&M, NTPC and TVS Motor.
Finally, the brokerage advised investors that nobody can catch a bottom and hence it is necessary to begin this process and achieve an attractive entry point by averaging on the downside.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
