Indian large-cap stocks have been a resilient lot, but that could change
Plenty of risks loom for the Indian markets. Oil prices are high. The rupee is flirting with historic lows compared to the dollar these days
For many months now, large-caps have stood firm, while mid-caps and small-caps floundered. But a number of clouds are gathering, raising the odds of a correction in large-caps. The Nifty 50 index shed 1.9% in the last three trading days (equity markets were shut on Thursday on account of Ganesh Chaturthi). Even then the Nifty 50 has risen 12% so far this fiscal year. In comparison, the Nifty Midcap 100 index is up by 1.5%, whereas the Nifty Smallcap 100 index has declined by 6.6%.
“We think it’s about time that we should turn cautious on the large–caps as well,” says Jitendra Gohil, head of India Equity Research at Credit Suisse Wealth Management India. The large companies are set for a correction in the next three-six months, he adds.
Plenty of risks loom for the Indian markets. Oil prices are high. The rupee is flirting with historic lows compared to the dollar these days. Remember, we have troubles on the fiscal deficit and current account deficit fronts. A slowdown in the economy is another risk.
According to Vinod Karki, vice president (strategy) at ICICI Securities Ltd, the correction in large-caps rests on two factors. “First, the current premium valuations have their underpinnings on superior earnings growth expectations.” That means any disappointment on earnings front could lead to derating of valuations. “Secondly, the domestic investors have been absorbing the FPI (foreign portfolio investor) selling so far. The risk is that if domestic inflows start reversing due to high volatility in equity markets, then it could lead to correction in large-caps too,” adds Karki.
Indian markets are looking expensive. Have a look at the accompanying chart. Data sourced from Credit Suisse shows India’s price-to-earnings ratio premium to the world and the emerging markets is now at 29% and 69%, respectively. That’s the highest in seven years.
However, it’s worth noting that India’s premium to the world and emerging markets has been higher than the current levels at the beginning of 2008.
On a year-to-date basis, India is the only equity market to see valuations expand in terms of 12-month forward price-to-earnings ratio.
The markets are factoring in the possibility that the Reserve Bank of India will raise interest rates. “If that happens, then consumption will be impacted and that in turn will have a bearing on growth,” says Gohil of Credit Suisse.
And then, the US Federal Reserve is expected to hike rates further twice this year. Liquidity will be a bit of a constraint, he says, adding, “In short, we are now closing the view that we don’t see a major correction in the large-caps.”
In the near term, investors should watch for nasty surprises in the forthcoming September quarter results. Over the medium term, political uncertainty in the run-up to the general elections in May could weigh on sentiment.
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