Last week, global markets were trading in red due to below par earnings adding fresh concerns over slowing economy & downgrade in earnings due to elevated inflation, oil prices, war uncertainties and supply issue. As a result, FIIs are on a selling spree, leading to total foreign net outflows of about Rs 23,000cr in India during the month. This negative trend of global equity market is visible from the uptrend of Dollar index (indicator made of constituent of a mix of other developed currencies assessing the strength of US Dollar). The value of dollar index is at 20yr high as investors are preferring haven assets like currencies, bonds & gold due to rising instability of equity market.
In India while FPIs are selling, domestic investors are positive with focus on defensives like consumption & domestic growth sectors like infra & capital goods. This roller coaster is continuing & will sustain due to weakening global trade. Traders are using buy at dip and sell in rally strategy. While long-term investors are staying put on domestic growth engines like capex, banking, defensives, and accumulating quality stocks. This period of volatility is the time for smart money to look for opportunities with buy-in-dip as the strategy. In this rangebound market, it is advised to stick to sectors which are expected to be least impacted by inflation & yield rise like banking, IT (though expensive), Pharma and themes like green energy.
On a broad term, valuations have moderated however marginally it is still on the higher side compared on a long-term basis. But what we must note is that this valuation will undergo a period of transition on a stock & sector basis. The pockets which are expensive today will moderate while value stocks will emerge. Valuation of sectors like FMCG, Pharma, Capital Goods & Manufacturing are attractive and can continue to grow and become more stable in the future.
Two sectors in focus during recent weeks are Cement & Insurance due to news of acquisition deals & IPO. Demand for cement is expected to be good in FY23 due to uptick in construction activities, private spending, and government projects. However, fuel & input cost, though softened from recent peaks, remains an issue. Companies are taking price hikes to pass on costs, but margins will be impacted in the short-term. Positively, the current stock prices factor in most of the negatives and are trading at below historical averages. Deal at good valuation, war situation and ease in input prices are opportunities for the sector to perform well.
Insurance is on the upside supported by the LIC IPO news, which is improving the traction due to anchor investors and higher attention from retails. Additionally, the sector is defensive in nature which is the key theme of the market today given volatile equity markets. Life Insurance industry is undergoing a phase of expansion nudged by the pandemic and claims will normalise in the future as covid cases are reducing. The valuation of the industry is attractive on a long-term basis. Regarding the LIC IPO we have a subscribe rating on a short to medium-term basis due to lucrative valuation & improvisation of norms which will benefit shareholders.
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