Oil price drop, valuation comfort: Time to buy in this market correction

The sharp correction in the markets over the past few sessions on account of global cues and developments back home have put the overall market valuation in an attractive zone and investors with a long-term view on equities can use this opportunity to buy, say brokerages. 

On a year-to-date basis, the benchmark Nifty is down around 14 per cent. Last time, it had dropped more during the period under consideration was in 2011, when the European debt crisis had dampened global investor sentiment. The index is down over 10 per cent from its record high of 12,352 on January 17.

Analysts at Jefferies say the risk-reward is now favourable for investors to start buying. With India not significantly impacted by the two major global events this year, they believe, its underperformance to peers is largely driven by domestic factors then such as slowing growth and the banking sector issues.

“Nifty is trading at 15.4x one-year forward price-earnings (PE) on consensus earnings, in line with long-term average and lowest since January 2017. The benchmark 10-year bond yields are at 6.07 per cent, lowest since the global financial crisis (GFC). However, with valuations much more amenable now, we believe that the risk-reward is favourable,” wrote Mahesh Nandurkar of Jefferies in a co-authored report with Abhinav Sinha.

Those at ICICI Securities, too, share a similar view and suggest investor with a long-term view on equities can look at fundamentally sound companies following the across-the-board sell off.

"Currently ‘earnings yield of the Nifty 50 index exceeds bond yield by 45 bps and such instances have provided high expected returns in the past. Examples include demonetisation (44 bps) and taper tantrum (+44 bps). Given the pre-emptive steps by policy makers, we assign very low probability of a global recession and view the current environment of earnings yield exceeding bond yield as an opportunity to buy equities," wrote Vinod Karki and Siddharth Gupta of ICICI Securities in a recent note.

Stimulus hope

Unlike the events such as the GFC, demonetisation and taper tantrum which caught policy makers unawares, analysts say, the COVID-19 episode is being carefully monitored and pre-emptive measures have been taken by governments and central banks through fiscal and monetary stimulus, which reduces the probability of a recession.

“The outbreak has already prompted a policy response, and we expect more easing in the coming months. The global monetary easing cycle will be extended as the US Fed delivers 75 basis points (bps) of cuts by 2Q20, while the European Central Bank (ECB) and Bank of Japan (BoJ) temporarily increase asset purchases. The majority of EM central banks will also cut rates further, taking global monetary policy rates to a new all-time low,” said analysts at Morgan Stanley.

That said, the current low oil prices, though beneficial for the Indian economy, cannot be taken for granted. India imports nearly 1.3 billion barrels of oil every year on a net basis. Every $10/barrel fall in the Brent oil price lowers India's current account deficit by around 40 basis points (bps) and gives an equal boost to the gross domestic product (GDP). BofA Securities has cut their FY21 current account deficit (CAD) forecast by 25bps to 0.7 per cent of GDP after their oil strategists cut the Brent oil price forecast by $9/barrel to $45/barrel. 

“Lower oil prices also can potentially release 0.4 per cent of GDP for additional consumption in FY21. We cut our FY21 FPI (foreign portfolio investor) inflow forecast by $5 billion. The RBI should cut 25bp on April 3 with our US economists expecting another 50bp FOMC cut on March 18,” wrote Indranil Sen Gupta, India Economist at BofA Securities in a co-authored report with Aastha Gudwani.