Markets down nearly 1% as investors turn profits on valuation concerns

According to Gaurav Dua, Head-Capital Market Strategy, Sharekhan by BNP Paribas, the recent all-round selling pressure seems to have weighed on the sentiment. However, he sees the ongoing volatility as part of a correction process in a multi-year rally and that is healthy for the markets.

“This will help eliminate the speculative foam and bring the fundamentals to the fore. As an investor, at this juncture it would be appropriate to shift the allocation towards large-cap and/or structural growth stories rather than chasing momentum,” Dua said.

India’s Volatility Index or India VIX closed higher by over 5% to end at 18.31, indicating a rise in panic and anxiety among investors. Amid high volatility, smaller stocks witnessed sharp selloff with both BSE Mid and Smallcap indices falling nearly 2%.

Sneha Poddar, Research, Broking and Distribution, Motilal Oswal Financial Services, said profit-booking followed a sharp rise in midcaps and smallcaps as valuations of many stocks have reached unrealistic levels. “However, if we remove some of the very costly names, this correction offers upside-down opportunities, given more relaxation in economic activity and pick-up, festive mood and better demand backdrop. Balance sheets and cash flows continue to improve as corporates tighten costs and leverage. Going forward, Q2FY22 earnings distribution versus earnings expectation will provide further direction to the market,” she said.

Rich valuations have started troubling investors as the September quarter earnings began. UBS has rated India underweight, describing it as ‘extremely expensive’. UBS believes that Indian stocks are the least attractive, especially in terms of valuation and earnings.

It added that India’s valuation is costly with weak earnings momentum, while the scope for economic recovery this year is slim. “Low real yields and an expensive currency suggest some vulnerability in the diluted environment,” UBS said.

Meanwhile, according to Morgan Stanley capex and productivity growth are likely to be the key drivers of growth in India as it is growing 6 percentage points (ppt) to gross domestic product (GDP) ratio from FY21 to FY26. It added that increasing the capex ratio will increase employment prospects and increase income and consumption, thereby creating a good cycle.