Fundamental analysis: What should investors do now? Stagger investments – Market News

By Jyotivardhan Jaipuria

The markets have seen a price correction over the past few weeks across the large cap, mid-cap and the small-cap segments. So what should investors do now?

Firstly, we have not seen a major correction. To put this in context, we have seen a correction of at least 10% in 23 of the past 25 years. What we are seeing is a normal correction after a sharp rally with valuations being expensive.

Secondly, the long-term story of India continues to be appealing. Earnings growth in FY24 is likely to be close to 20%. September quarter results will also be similar. This is in contrast to countries like USA, where growth is flattish. Looking at the next few years, India is poised to be the fastest growing economy in the world, which sets the base for strong equity performance. From a foreign investment point of view, we see investors using every dip in relative valuations to buy India. The current weight of India at 14% in emerging market indices appears low in contrast with China at 28%. Moreover, the importance of FPI selling has now been mitigated by domestic flows to equities with SIPs aggregating close to `16,000 crore a month.

Thirdly, the reason we are a bit cautious near term is that valuations provide no margin for safety. While valuations have corrected over the past three months, they still remain above long-term averages with a one-year forward PE of the Nifty at close to 20x. In a relative context, too, while valuations have corrected from the peak, they remain expensive with India now trading a premium of 90% to the MSCI PE ratio well above the long-term average of 59%. 

Lastly, while there are fundamental tailwinds domestically, we see global headwinds which may lead to a price and time correction. The US 10-year bond yields are the highest since the Global Financial Crisis and flirted with 5% recently as worries on inflation and budget deficits as well as indebtedness of the US came to the fore. The Fed has indicated that interest rates will be “higher for longer”, though a rising bond yield probably means there may not be a further Fed increase this year. Rising bond yields are negative for earnings and the economy as well as stock valuations. Apart from this, any spike in oil prices in the wake of the West Asia war could hurt India’s macro stability.

So what does this mean for investors? Overall, we continue to be positive on equities over the next few years and see Indian equity markets being one of the best performers globally. 

Near term, we could see some price and time correction which will help valuations come to the fair value range. While returns will be strong even at current levels, we would recommend investors putting fresh money in a staggered manner over the next few months to take advantage of a price correction, if any.