With smallcap and midcap (SMID) indices plunging about 15 per cent each since end-September, despite strong domestic inflows, investors are wondering whether this trend is just a blip as seen in 2015 and 2022 or a bear market dawn à la 2011 and 2018.
Nuvama Institutional Equities said dynamics of the current correction resemble a bear market, as the slowdown is now led by domestic credit. SMID profits (ex-BFSI) have slipped into contraction. Also, the durable liquidity has moved into deficit for the first time in 2020s. While the RBI is trying to fix it, sustained liquidity improvement will need dollar to stabilise, Nuvama said.
Besides, even after the correction, smallcap and midcap valuations are 1SD expensive with 5-year return being 25 per cent. This made it believe that more pain is ahead and that stimulative policies are key to any reversal.
"If history is a guide (2011–13, 2018–19), then investors must brace for longer pain in SMIDs. Seeking value in cyclicals (despite 30–40 per cent fall) risks being a trap. A dovish Fed and sizable domestic easing are key to turning bullish," said Nuvama Institutional Equities in a note.
During the past bear markets, cyclicals (industrials, RE, NBFCs and PSU banks) corrected more than 50 per cent. While some stocks have already corrected by a similar amount this time, valuations are still rich and margins very elevated, making them prone to larger earnings cuts amid a demand slowdown, Nuvama said.
The brokerage prefers exporters (chemicals), domestic laggards with bottoming profitability (cement, QSR) and compounders.
It dividend its stock picks into three categories. The first is restructurers. These are cyclicals, turnaround stories at reasonable prices. Nuvama included Emami Ltd, Jubilant FoodWorks Ltd, United Breweries Ltd, JK Cement Ltd, Jubilant Ingrevia Ltd, UPL Ltd, Crompton Consumer and Balkrishna Industries Ltd in this list.
Its second list is called reinvestors i.e. companies that have been consistent compounders. They include Coforge Ltd, Uni Minda Ltd, KEI Industries Ltd, Ajanta Pharma Ltd, APL Apollo, Coromandel and Bikaji.
Its third list is called cash cows i.e. companies with high dividend yield and offer spin-off opportunities. They include NMDC, Petronet LNG, Embassy Office Parks REIT, Sun TV Ltd and Mahanagar Gas Ltd.