Defence, Railways, Capital goods sectors trading at elevated valuations: Prefer IT, Private Banks - Religare’s Mishra

Expert Views: Sectors as Defence, Railways, Capital goods are still trading at elevated valuations, said Ajit Mishra – SVP Research, Religare Broking Ltd talking to Mint. He prefers private banks and IT, despite short-term hurdles while advices Investors to exercise caution with mid and small-cap stocks. Mishra said that decline in crude oil prices, coupled with buying in select heavyweight stocks, is helping to limit the overall damage to the markets so far. Edited Excerpts

Q1: What are the key concerns that are leading to pressure on the markets in past few sessions barring one yesterday?

Markets have been under pressure, primarily due to global uncertainties, particularly stemming from the US. Weak US job data has raised concerns about a potential slowdown in the world largest economy, which could affect global growth prospects. Additionally, ongoing debate over the extent of the US Feds rate cut is contributing to market anxiety. On the domestic front, the continued underperformance of the banking sector is also dampening sentiment. However, the sharp decline in crude oil prices, coupled with buying in select heavyweight stocks, is helping to limit the overall damage so far.

Q2: What are the possible ways in which markets can react to the outcome of the US FOMC meeting. Will just a 25 bps rate cut by US fed lead to disappointment for the markets?

Recent U.S. data has sent mixed signals, and with a 25 bps rate cut already priced in, it’s unlikely to trigger a major market reaction. We believe the Fed’s guidance on inflation, growth, and future rate cuts will be crucial in shaping the broader market outlook, particularly regarding global liquidity and risk appetite. A 50 bps cut, however, could spark a positive response, especially from emerging markets like India. That said, the impact might be short-lived, as such a move could also raise concerns about the underlying strength of the U.S. economy.

Q 3: What are the triggers that can lead to upside for the markets?

We believe strong earnings growth in key sectors, along with a revival in private capital expenditure—reflecting increased business confidence—could provide the necessary catalysts for a sustained market rally. In addition to steady domestic inflows, continued support from foreign funds will be crucial to maintaining momentum. Furthermore, stability in global markets and positive developments in the U.S. political landscape could offer additional support to market growth.

Q4: How should investors approach the markets and which are the sectors and stocks that offer value. Which need be avoided?

Currently, sectors like defense, railways, and capital goods are still trading at elevated valuations, driven by expectations of strong earnings growth. Investors should remain cautious, as any disappointment in meeting these expectations could negatively impact valuations. On the other hand, sectors such as private banks and IT, despite facing short-term hurdles, are presenting more attractive valuations. In this market environment, investors should adopt a long-term strategy with realistic return expectations.

Q5: How should investors approach mid and small caps? How are they being valued now compared to large cap and Nifty valuations?

Investors should exercise caution with mid and small-cap stocks in the Indian market, as their valuations are higher than historical averages. While the Nifty- 50 index is trading at a Price to earnings ratio of 23 times, the Nifty Midcap 100 index is significantly higher at 43x, reflecting its strong performance over the last five quarters. Given these stretched valuations, large-cap stocks offer a more favorable risk-reward balance, especially in sectors such as consumption, infrastructure, and banking. Investors are advised to prioritize large caps with reasonable valuations and growth potential, while being selective in their approach.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions