Kotak Institutional Equities (Kotak Securities) believes the market may continue to see consolidation over the next few months as it is yet to fully digest the headwinds of rich valuations, a longer phase of higher interest rates and concerns over growth.
"We see (1) higher-for-longer interest rates and slow recovery in consumption of low-income households as the key themes for the economy and (2) related de-rating in multiples of ‘growth’ stocks from higher-for-longer interest rates as the key theme for the market for the first half of the calendar year 2023 (1HCY23)," said Kotak in a report on December 19.
The brokerage firm expects the RBI to hold the peak policy rate at 6.25-6.5 percent for most of 2023 as it gauges the impact of monetary tightening on inflation.
It expects CPI inflation to stay above 5 percent for most of FY24 and core inflation to be closer to 6 percent, which may preclude any quick pivot by the RBI.
According to the brokerage firm, other central banks will probably follow a similar approach as inflation will likely stay above the target of central banks for an extended period of time.
Kotak anticipates a period of consolidation for the Indian market with further correction in multiples of the market led by a gradual de-rating of multiples of ‘growth’ stocks from current high levels as the market reconciles to higher-for-longer interest rates.
According to Kotak, they are yet to correct to lower multiples, commensurate with higher interest rates except for IT services stocks.
"Global markets have seen a sharp realignment in the past 12 months to lower multiples as they have reconciled to the end of 13-14 years of low-interest rates. ‘Growth’ stocks had seen tremendous re-rating in their multiples in the past decade as markets started expecting low-interest rates in perpetuity thanks to an extended period of low-interest rates," said Kotak.
On the earnings front, Kotak sees a low scope for positive earnings surprises given meaningful global and modest domestic headwinds, such as (1) global slowdown with a possible recession in several developed economies, (2) likely fiscal consolidation even in an election year, and (3) no visible pickup in domestic investment.
"We model 16 percent and 15 percent growth in net profits of the Nifty50 Index in FY24 and FY25 but do not rule out downside risks in the case of economic disappointment versus our expectation," said Kotak.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.