'Meaningful correction': What Emkay says on stock market; 5 smallcap, midcap shares it likes

Emkay Global said the recent post-election rally has surprised it and that the domestic brokerage sees little near-term upside on Nifty from the prevailing current levels because of elevated valuations and a lack of positive catalysts.

That said, even as Emkay sees a pause in the ongoing multi-year bull run, it sees little chance of a meaningful correction. It is constructive on the manufacturing and investment cycle and prefers playing it through durables (automobile) and materials.

"We, however, also see counter-intuitive opportunities in FMCG and Tech on relative valuations. Industrials and Financials are better played through select SMIDs, in our view," it said while suggesting Jubilant FoodWorks, Honasa Consumer, Suprajit Engineering and Metropolis Healthcare as its top small and midcap (SMID) picks. The brokerage filtered the stocks on growth-adjusted valuations, ROE trends, and cash-flow ratios. It did not consider the stock-price momentum.

The brokerage said the coalition government could bring more uncertainty in policymaking, it does not foresee any pivot towards large-scale welfare spending. The post-Covid cycle of manufacturing over services and investment over consumption remains undisturbed, it said.

"Much of this however is in the price, and our sector positioning reflects this nuance. Our counterintuitive calls are i) OW on staples, where we see earnings acceleration and valuation accompanied by a possible turnaround in mass spending; ii) UW on Industrials, where valuations are stretched and earnings growth, though robust, is decelerating; and iii) OW on Technology, where valuations are near LTA even if the growth recovery is 2-3 quarters away," it said.

Emkay said its other major calls are Overweight on Durables (strong cycle and cash flows) and Underweight on Financials (valuations out of sync with growth).

"This is a stock-pickers vs top-down market, so there are a few exceptions: e.g. opportunities in select SMID Industrials," Emkay said.