Steep correction

Market valuations are becoming reasonable

The collapse of Silicon Valley Bank and the meltdown of Credit Suisse have led to much uncertainty about market trends. Investors are wary of issues surfacing in the financial sector, since those may cause widespread contagion. A financial crunch could lead to slower revenue growth, lower corporate earnings and, given rising interest rates, lower valuation discounts too. The Nifty has dropped 4.8 per cent in the past 30 days, and it is down 16.8 per cent from the all-time high of 18,887, achieved in November 2022. The benchmark index is now trading at a price-to-earnings (PE) ratio of 20.2, which is well below the two-year average of 24 and the five-year average of 26.7. However, valuations remain high in comparison to other emerging markets. For example, Brazil’s Bovespa is at PE of 6, Indonesia’s IDX is at PE of 12, and China’s Shanghai Composite is at PE of 13. But India has far higher growth projections, which arguably justifies a valuation premium.

There are specific sectors of concern and underperformance, which could transform into opportunities for value investors. Industrial metals have underperformed for the past year and there was a recent sell-off in these stocks, as investors responded in knee-jerk fashion to banking turmoil. But India’s listed metals companies include several of the world’s most cost-effective producers. It may be noted China has opened up its economy after Covid restrictions, but it is consciously cutting carbon-intensive metals production and is, therefore, now a net importer of aluminium, copper, and steel. Hence, India’s metals producers could attract investors as panic eases. Energy trends present another set of interesting variables. The cooling off of global demand has led to reduction and stabilisation in crude oil and gas prices. This is, in itself, a positive for energy-importing India, which imports 85 per cent of the crude oil it needs. It may lead to a positive re-rating of refiners-cum-retail marketers, which suffered under-recoveries through the past 15 months. In addition, lower energy costs could be a boon for the aviation and logistics sectors.

To be sure, another key sector, the automobiles (including commercial vehicles and two- and three-wheelers), is still seeing muted demand, which indicates private consumption is not strong. However, sales have improved year-on-year, though still trending below the pre-Covid levels in categories like two-wheelers. The erstwhile darling of investors, the IT sector, has lost more ground than the market. The IT index is down 8.8 per cent in the past one month, and has declined over 20 per cent in the past one year. Management guidance has been cautious when it comes to growth projections. There have been slowdowns in hiring. However, the managements of the big IT companies appear confident they can deliver moderate growth allied to maintaining margins.

There has been a notable shift in foreign portfolio investors’ (FPIs’) attitude even as domestic mutual fund inflows have stayed strong. FPIs sold a net Rs 28,852 crore of equity in January and another Rs 5,295 crore in February. They have, so far, bought a net Rs 7,891 crore in March. During uncertain periods like this, fair valuations become a fuzzy target. But if the FPI attitude has really turned positive, the stock market may have bottomed out. However, this would depend on conditions such as the global banking crisis being contained and the geopolitics of the Ukraine war not triggering another downturn in sentiment.