Shift from supremely valued stocks and sectors to value ideas

Last week market started positively but ended flat due to profit booking led by fresh worries over possible delay in US-China trade deal, which did not make any headways this week. And additionally, factors like FED minutes and stringent US H1-B visa fueled negativity in India and abroad. Domestic blue-chips were finding it difficult to maintain its positivity due to supremely high valuation. Nifty50 is now trading at one year forward P/E of 19x and 26x on 12 month trailing basis which does not provide much leeway to perform well in the near-term. We foresee some consolidation due to premium valuation of large-caps and weak macros. But on a one-year forward basis we have a target of 12,600 for Nifty 50 which we are maintaining. Our view is that the next momentum will be driven by beaten down stocks and sectors while high quality names may reverse in term of valuation.

This week the focus is on Q2GDP data which is expected to be weak, lower than the 5% reported in Q1. Focus is also on the RBI policy meet to be held on 5^th December. Market expects a cut of 25bps in repo rate to 4.9%. In spite of increase in consumer inflation and deficit gap, slowdown in economy will outweigh MPC’s decision. Market expects RBI to maintain its accommodative stance with dovish outlook providing tailwinds for more cuts in the next policy meet in February 2020. This expectation is providing an advantage to rate sensitive stocks especially banks. The risk is that if there is a change in RBI outlook it will impact market’s momentum in the short-term.

Metals are underperforming today due to international trade deals like US-China and Brexit subduing demand and price of commodities. In the near-term the trend is likely to be tepid due to low volume and heavy balance-sheet of such sectors. We had a negative rating on the sector which has improved to neutral, majority of stocks under our coverage are currently with a ‘hold’ recommendation. And we foresee a change in the global outlook as deals are confirmed. There is a probability that US-China will agree for the first phase of the deal next month, the deadline being 1^st March 2020. UK general election is slated to be held on 12^th December 2019 which will provide better picture with a new plan. Commodity stocks may do better in the long run with possible change in global cycle in the next two quarters. Investors should be watchful on the sector with a positive bias.

During the week market elevated to a record high coupled with fresh triggers on trade deal and revival in domestic earnings growth led by stimulus declared in the last three months. The expectation is also very high that more stimulus will be announced by the government in the future. However, market was not able to hold the gains and bowed to volatility ahead of derivative expiry, political drama, and caution on upcoming GDP data and its likely implication on RBI policy, leading investors to book profit. The highest risk to the market is that premium valuation is not providing room for broader market to move higher. The best strategy is to shift from premium scripts to stocks and sectors which will benefit from revamp in the economy, value stocks, and quality mid and small caps. We feel that rising foreign inflows and confidence that government will address the fiscal gaps through divestment will maintain the buoyancy of the market in the long-term.

Posted: November 28, 2019