The spectacular rally, which took the Nifty from the March 2020 lows of 7511 to the recent high of 18604, was a unique one-way rally without any major correction. The one-way rally has ended with a near 10 percent correction from the peak. The easy money making phase of this rally is over. Returns in 2022 are likely to be modest and, therefore, generating superior returns would be a challenge. However, right stock picking can deliver market-beating returns.
At 17000 Nifty is trading at around 20 times FY23 earnings. Valuations, even after the correction, continue to be high; but cannot be regarded excessive now. There are some clouds on the market horizon like the uncertainty created by the Omicron variant of the virus. But, there are plenty of economic silver linings among the clouds, which augur well for stock picking.
The recent market correction has been mainly triggered by the relentless selling by FIIs. FIIs have been selling in the secondary market since October and the pace of selling accelerated in November and early December. In October FIIs sold equity worth Rs 14475 crores and in November the sell figure exploded to Rs 33799 crores. In December, up to 6th, FIIs have sold shares worth Rs 11222 crores. (Source: NSDL). It is this relentless selling, more than anything else, that spooked the markets.
Why are FIIs selling?
In early November many leading foreign brokerages had downgraded India from overweight to neutral. The downgrade was on valuation concerns. India’s PE is 60 percent higher than EM peers and Price to Book is 100 percent higher than EM peers. Market cap to GDP, too, is excessive at around 120 percent. It is this overvaluation that triggered the downgrade and the consequent sustained selling.
The silver lining is the positive economic news. GDP growth for Q2 FY22 at 8.4 percent is better than expected. GST collections have consistently improved (Rs 1.31 lakh crores in November) making room for the government to sustain higher expenditure. GDFC (Gross Domestic Fixed Capital Formation) has improved to 28 percent of GDP. There are clear indications of uptrend in capex cycle. India is likely to end FY 22 with GDP growth close to 10 percent, making India the fastest growing large economy in the world in FY 22. The uptrend in capex cycle can sustain GDP growth rate above 7 percent. Since Corporate Profit to GDP is on an uptrend, earnings growth of 20 percent for 3 to 4 years is achievable. Seen from this perspective, valuations are not stretched.
The 10 percent correction from the peak has made some segments and stocks attractive. Financials and IT have high earnings visibility and, therefore, are attractive buys at current valuations. Banks have been underperforming in this bull run mainly due to sustained selling by FIIs. In November alone FIIs sold bank stocks worth Rs15606 crores. This has more to do with the portfolio construct of FIIs – banking with Assets Under Custody of Rs 818524 crores constitute the largest holding of FIIs – rather than any issues in banking. Banks have recovered from asset quality concerns as reflected by Q1 and Q2 numbers and credit growth is picking up. This is the right time to invest in high quality large private sector banks and a couple of leading PSU banks. IT stocks, despite rich valuations, are attractive investment bets even now since the sector is in a multi-year uptrend. Long-term investors can use the correction to buy now in banking and IT, irrespective of FII activity in the market.
