War dynamics strengthened during the week. An improvement in market trend, which was noticed during the start of the week turned hostile. The conflict between Russia-Ukraine got aggressive and fresh sanctions were imposed on Russia. The global market went on back-pedal given lack of buyers due to high volatility & rise in commodity prices due to supply constraints.
FIIs have become a big seller in the Indian market. We have good buying from local MFs & domestic institutions, but not enough to maintain the market trend. Retail investors are also buying, but the level of inflows has reduced after the correction in the market. We can expect improvement in sentiment, including FIIs, if war & commodity prices moderate, in the future.
This ongoing weakness has effect large caps more this week. Mid & Small caps have outperformed maybe in the context of the large carnage of the broad market in the last 3months. It did generate an opportunity for local investors to buy good stocks as the broad market looks a good pick on a long-term basis.
It makes sense to deploy the surplus cash in your portfolio, in a step-by-step manner assuming stability in equity market. Release of strategic oil reserves in India & abroad along with the increase in OPEC & non-OPEC output will be a big ease for crude prices & the Indian market.
Metal stocks did well this week due to rise of international steel prices owing to curtailment of Russian exports and high exposure of Russia & Ukraine in the global steel exports. Indian steel exporters are expected to benefit from this imbalance.
However, we need to note that this ongoing benefit is in the context of the ongoing war due to supply constraints. This trend can quickly change as per the status of war. Developing a high exposure to commodity & energy stocks today will work against the future trend. Instead, better will be to increase the exposure of stable stocks & sectors.
The ongoing downfall has improved the valuation matrix of the Indian market from expensive to fair, though not cheap. Nifty50 is trading just around the 5yrs averages of 18.5x on P/E and 2.8x on a P/B on a 1yrs forward basis. The near future of the market will depend on the war development. However, on a medium to long-term basis, it makes sense to start deploying the funds into equity.
But value buying will be the key to outperform the market. Sector wise the best will be Banks, Consumption, Capital Goods, Pharma and Telecom. They are trading at fair valuations, just below the averages of last 5yrs, and have a good long-term business outlook. Tactical pockets today are Gas, IT, Capital goods, and Pvt banks.
Next week, the Indian market will look at the state election exit poll data while the global market on war developments, BoE, and Fed policy. Based on current consensus, state elections outcome is unlikely to be a crucial factor rather than a short-term positive & negative reaction, accordingly.
Due to war uncertainties, central banks may bring a balance in its hawkish policy against earlier due to high inflation. It can provide a leeway to the market in the short-term.
(The article is written by Vinod Nair, Head of Research at Geojit Financial Services)
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