Indian equities, world’s worst performing, may have bottomed out; buy quality

Dalal Street’s Nifty, down 8 percent so far in October, is likely to have put the worst behind as investors pick up quality blue chips and a few large midcaps in a bid to repair damaged portfolios and recoup pride. 

October turned out to the perfect storm on India’s equity market landscape – an overheated bull-run, fuelled by record monthly retail inflows, extreme optimism in the primary and SME markets, eye-popping valuations, and a giddy feeling that nothing could go wrong on the long side. 

“The Indian stock market's performance in the past 1 year or so has led to immense arrogance and smugness amongst local investors, investment bankers & policy makers,” Shankar Sharma, Founder GQuant, told Business Today. “Market falls of this kind are timely reminders of the fact that smugness is the biggest enemy for an economy or a market and its participants.” 

And what a fall it was! The 50-share benchmark Nifty surged 21 percent year-to-date till September 27, making it the 2nd best performing major index globally. This is where the bears stepped in! Rising US 10-year bond yields, a firm Dollar Index and above all fears of tepid second quarter earnings from Indian corporates slaughtered the bulls. 

The last straw was Tel Aviv’s obliteration of Hezbollah in the oil-rich Middle East spiking crude oil prices as they sparked fears of a wider conflict between Israel and Iran. 

Foreigners were the first to abandon ship and head back for US and Chinese shores. 

So far, in the 19 sessions in October – overseas institutions pulled out Rs 105,000 crore ($12.5 billion) from shares such as HDFC Bank, Reliance Industries, ICICI Bank, TCS, Hindustan Lever and ITC to name just a few. The Midcap and the small cap indices lost 10 percent each. Many other major indices have shaved between 15-21 percent over last 3 months as investors worked the valuation math versus risk-reward. 

WHAT NOW? 

The possibility that stocks could correct further in a market that has posted back-to-back gains for eight consecutive years and has not seen a 10 percent correction in 18 months remains on the table. 

But what is also undeniable is the robustness of domestic institutions, who have matched every dollar sale by FIIs with an equal, if not more, purchase. Slowly but surely domestic retail audience is now owning a bigger pie of Indian corporates equity cake! Will that work to our advantage in the longer run, only time will tell! 

Second quarter earnings have disappointed equity strategists, but fact remains that large part of frothy valuations in sectors such as Defence, Railways and PSUs have reverted towards mean averages, as have stock prices. 

Should you believe in the longer-term outperformance of Indian equities and were sensibly waiting for shares to correct, this could be the right time to put in that SIP into a good equity diversified fund and buy the market lower or average down your earlier purchases. 

You could also look at adding a flexi-cap fund with a higher weightage to large cap blue chips; a balanced fund to get in that kicker from a possible rate cut by the Reserve Bank of India or purchase a Nifty-based ETF to mirror the movement of the Index. 

As for Dubai-based Sharma, one of the savviest stock pickers in the market, he continues to prefer quality small caps over well-researched stocks. 

“The return from Indian equities is now very average after factoring in increase in capital gains taxes. At this time, we all woke up and smelt, coffee or whatever else,” he said.