Around 66% of BSE 500 universe is in the red since October, shows data

Around 66 per cent of the BSE 500 universe is in the red since October, with 71 stocks losing more than 25 per cent of their value.

The conflict between Russia and Ukraine and the subsequent market correction may appear to be a good opportunity for investors to nibble into these stocks. But market watchers are of the opinion that valuations are still expensive and there is no clear answer to whether the markets have turned attractive.

“Given India’s already stretched equity valuations and global headwinds, we believe the market may remain choppy and advise investors to wait for better entry opportunities and invest only upon large corrections,” said a recent note by Credit Suisse Wealth Management India.

Foreign portfolio investors (FPIs) remain uncomfortable with India’s valuation premium and have sold about $20 billion since October. Nevertheless, domestic institutional investors (DIIs) and retail investors have absorbed a significant portion of selling pressure, so far. The mammoth LIC initial public offering, expected over a few weeks, may also impact liquidity, leading to a further correction.

The benchmark indices have recouped losses over the last few sessions after a steep correction the week before and are down 3 per cent in the year to date.

The market may not be fully factoring in the longer-term impact of the rising interest rates and inflation. “The impact of the Russia-Ukraine war on global inflation, commodity prices, and supply chain can only be known over the next two quarters. And we are yet to figure out the impact of the rising interest rates and inflation in India,” said Deepak Jasani, head-retail, HDFC Securities.

FMCG companies in India, for instance, have already effected price hikes of 10-25 per cent across categories, such as soaps, shampoos, paints, biscuits and edible oil in FY22.

The ongoing crude and commodities shock in the wake of the Russia-Ukraine conflict is likely to have negative implications for India’s macro situation in terms of higher inflation and bond yields, higher current account deficit, weaker INR, and potentially weaker consumer demand, and thus a lower GDP growth rate.

Some market watchers believe that the recent correction in the market has made valuations more palatable. At 18.1x currently, the Nifty index valuation appears to be expensive relative to the 20-year average of 16.1x and reasonable versus the 10-year average of 18.5x, according to Emkay’s India strategy report. The Nifty composition has changed towards higher P/E (growth) stocks, which makes recent averages more relevant, it said.

“Several stocks have corrected 25-50 per cent from their peak over the past 4-5 months. The conflict between Russia and Ukraine poses a near-term headwind but there is scope for bottom-up investing in the mid- and small-cap segments,” said Sachin Shah, Fund Manager, Emkay Investment Managers.

Kotak Institutional Equities says it finds reasonable reward/risk balance in sectors, such as banks and diversified financials, capital goods, real estate and specialty chemicals, while valuations of most ‘growth’ stocks remain rich.

Credit Suisse Wealth Management India recommends investors to focus on domestic cyclical companies, such as banks, cement, and staffing companies, apart from reopening trades, including multiplexes. The major risk can come from oil shock for Indian equities as reopening of the global economy may spur demand, it said.