Sensex, Nifty: Emkay Global in its latest strategy note said it sees the risk of an imminent 5-10 per cent correction in the headline indices Sensex and Nifty, with bigger drawdowns in smallcap and midcap stocks. Nifty valuations are stretched at 21.4 times 1-year forward PE, and a positive Union Budget 2024 is now in the price, it said adding that there are no additional positive catalysts.
The domestic brokerage expects a tepid 1QFY25 earnings season with rate cuts coming only at end-CY24.
"A sell-off is likely to be led by industrials (high valuations) and financials (most liquid), but durables (Autos) are vulnerable too. The best places to hide are staples, energy, and technology, in that order. We remain constructive on India from a longer-term (>1 year) perspective, and would use a meaningful correction to increase exposure to the market," it said.
Emkay Global said it expects the government to preserve policy continuity in the Budget. Fiscal Deficit should be maintained at 5-5.1 per cent of GDP, with a focus on capex over revex, it said.
"We see little risk of a pivot to increased welfare spending, despite the pressures of a relatively adverse election result and the loss of absolute majority for the BJP. The Rs 2.1 lakh crore windfall from the RBI dividend gives the GoI increased degrees of freedom on both, pursuing fiscal prudence and pushing capex," it said.
That said, Emkay Global said it would watch for forward movement on privatisation (unlikely) and asset monetization (more likely).
There is an outlier probability of negative changes in the capital gains regime which could trigger a strong sell-off and prolonged sideways market thereafter, it said.
"Beyond the Budget, we think the market is too complacent about the changed political scenario. Though the GoI remains stable, there could be adverse events (like a possible NDA defeat in the upcoming Maharashtra assembly elections) that could exacerbate uncertainty," it said.
The FY25 Nifty EPS estimate has fallen to 16.5 per cent (FY24: 18.2%). While there is little downside risk to the forecasts, upgrade potential also looks dim, Emkay Global said.
"A weak 1Q owing to stretched valuations and a strong lead-up stock-price rally could, however, trigger a correction. The manufacturing sector, overall, is a little more exposed to this risk than services. Tech would be most immune from this trend," it said.
For investors wishing to position themselves ahead of the year-end rate cuts, the best sectors would be autos, real estate, and technology – this, however, could take more than six months to fructify, it said.
Valuations Nifty, at 21.4 times 1-year forward PE is 10 per cent above its 5-year historic mean. Valuations for the NSE Midcap 150 (42 times trailing) and NSE smallcap 250 (31 times trailing) are also 52.5 per cent and 35.5 per cent (respectively) above their 5-year averages. Even accounting for the strong growth outlook, Emkay sees these valuations having some front-ended future returns and setting up the market for a one-time correction.
"Only meaningful upgrades in forward estimates could support such elevated multiples, and we do not see that in the next 1-2 quarters," it said.