Caution ahead! These key risks may bring about a sharp correction in Indian stock market in near term

Benchmark equity indices BSE Sensex and NSE Nifty have soared more than 10 per cent so far this financial year thanks to Rs 1.58 lakh crore of net investment from foreign institutional investors (FIIs). They offloaded shares worth Rs 37,632 crore in the previous financial year ended. Market watchers believe that India seems well poised for growth in the longer term. However, a few headwinds will be a real test for the economy and market.

This includes the impact of El Nino on crops and inflation as food inflation has spiked to over 7.4 per cent and the rainfall outlook remains subdued. According to Prabhudas Lilladher, there is a dim possibility of further cuts in interest rates with some possibility of an increase in the second half.

“We expect markets to start factoring in political risks as election-related activity picks up with state elections in November and Lok Sabha elections in April 2024,” the brokerage said in a report adding the economy is getting a big push from the union government-induced capex even as rural India is showing faint signs of recovery and urban discretionary demand remains tepid.

Prabhudas Lilladher further said that the expected interest rate hike in the US and its impact on the rupee against the dollar with impending political and inflation risk can impact capital flows. We believe high inflation can be a political hot potato in an election year, forcing the government to slow down capex.

Gaurav Dua, Head-Capital Market Strategy, Sharekhan by BNP Paribas further added that some of the important events that could impact markets are the possible recession in developed markets, rising crude oil prices and the forthcoming state elections.

“If the outcome is far worse than market expectation, it could have a meaningful impact on markets. However, it is generally seen that the known risk does get absorbed quickly by the markets. It is always the unknown risk that can lead to a sharp correction in the market,” Dua said.

He further added that the same reasons stand valid for positive triggers also. If the outcome is much better than market expectations and the central banks’ move ahead with unwinding the hawkish monetary stance, the equity markets could get the boost required to show a smart rally from here also.

Also read: Hot stocks on August 22, 2023: Adani Power, Zomato, BHEL, Welspun Enterprises, Union Bank and more

Stocks to buy

Prabhudas Lilladher remains bullish on the auto, banks, capital goods and healthcare sectors. However, it cut the Nifty target to 20,735 due to a cut in earnings (impact of floods and late Diwali in Q2) and expects markets to consolidate ahead of the 2024 elections. It suggests investors adopt the stock-specific approach and avoid sectors or companies with weak fundamentals and a lack of business moats.

Avenue Supermarts, ICICI Bank, Maruti Suzuki, Reliance Industries, Siemens, State Bank of India and Titan are among the top picks of Prabhudas Lilladher in the large-cap space. On the other hand, it prefers Ashok Leyland, Carborundum Universal, Chalet Hotels, Gujarat Gas, Navneet Education and Safari Industries (India) in the broader space. The BSE Midcap and BSE Smallcap indices have surged 27 per cent and 32 per cent, respectively, since April 1, 2023.

Also read: RIL shares: What analysts say ahead of Reliance Industries AGM on August 28; stock price targets & more

Also read: Voda Idea, Zomato, Sulzon Energy, YES Bank, HCC shares gain up to 6% amid high volumes; SJS leads turnover