Markets to correct another 4/5%, use defensive approach, says Shrikant Chouhan of Kotak Securities

Shrikant Chouhan, Head Equity Research, Kotak Securities expects markets to correct another 4/5% from current levels. He advised investors to shift towards large-cap stocks for stability and better valuation opportunities in an increasingly volatile market. They can remain invested in quality small and midcaps. Given heightened volatility, a defensive approach focusing on FMCG, pharma, and IT sectors, particularly major index stocks, is recommended, he said. Edited Excerpts.

After a strong bull run, markets have corrected a bit recently. Was that just profit booking or its is moving towards a correction phase?

The markets corrected following fears of a recession in the US, fresh tensions between Iran and Israel, and a plunge in Japanese shares after the rapid appreciation of the yen. Furthermore, geopolitical risks have increased in recent weeks, particularly in the Middle East, which may impact oil prices, and Bangladesh, which may impact certain companies. These factors can cause the markets to correct another 4/5 % from current levels.

What other factors can contribute to an extended correction period for the Indian markets?

(1) The sharper-than-expected weakness in US labor markets, (2) a prolonged slowdown in China and (3) recession worries in Japan increase the risks to consensus earnings estimates for FY25. These factors can contribute to an extended correction period for the Indian markets.

Midcaps and smallcaps are crashing harder after a strong outperformance over benchmarks till now. Do you believe now is the time to shift to largecaps?

Most of the non-financial Nifty-50 constituents currently trade at expensive multiples, relative to their own history. The extent of ‘richness’ in multiples is accentuated in broader markets, across most buckets of consumption, investment and outsourcing. Valuations remain challenging for most parts of the broad market. While midcap and smallcap stocks outperformed large caps in the first half due to strong domestic demand, favorable government policies, and robust earnings growth, their valuations are now stretched, making them less attractive. Conversely, large-cap stocks offer more reasonable valuations. Under such circumstance, investors shall shift towards large-cap stocks for stability and better valuation opportunities in an increasingly volatile market. They can remain invested in quality small and midcaps.

What market strategy should investors follow with more correction in mind?

Given the mixed signals and heightened volatility, a defensive approach focusing on FMCG, pharma, and IT sectors, particularly major index stocks, is advisable. It’s also prudent to have exit strategies for overbought themes like defense, railways, PSUs in case of further declines.

Should low risk investors shift from equities to gold or fixed income assets?

Under current period of high valuations of broader market and volatility, as part of tactical asset allocation, a risk averse long-term investor should invest 50% in equities, 25% in bonds, 15% in real estate and 10% in gold. Investor may tweak their allocations to capitalize on temporary/short-term events.

Will FPI investment return to India in the near term? What is keeping the FPIs cautious?

The sharper-than-expected weakness in US labor markets, a prolonged slowdown in China, recession worries in Japan, geo-political tensions are some of the factors players on the minds of market participant, including FPI’s. India long term growth story remains intact and FPI’s will eventually look India favorably. Gradual weakening of the US economy coupled with soft inflation numbers, has increased the probability of the US Fed cutting rates. A cut in US rates may see higher emerging market and India inflows.

What are your views regarding the June quarter earnings so far?

Overall, the performance was mixed across various sectors. On expected lines, IT services companies delivered a better quarter. Large IT companies delivered revenues in line with or better than our estimates. Most large IT companies delivered YoY increase in EBIT margins. In the auto sector, few OEM’s reported better than expected operational performance. Cement sector witnessed challenge from soft demand and weak cement prices. BFSI sector saw moderation in loan growth, sequential pressure on NIMs and higher credit cost. FMCG companies saw some pick-up in volumes during the quarter.

When do you see RBI reducing rates? Will it wait for the US Fed to cut rates first?

Dovish global monetary policy cycle and moderating domestic inflation will provide the RBI with the scope to embark on a shallow rate cut cycle. Our expectation is of 50 bps of rate cut in FY25 (December 2024 and February 2025) and another 25-50 bps in FY26, depending on inflation dropping to 4 percent on a sustained basis.

One piece of advise for new investors?

New investors should prioritize a systematic investment approach. Avoid the urge to invest all funds at current levels, while also steering clear of excessive caution. Instead, invest a portion at current levels and progressively allocate more at crucial support levels or every month.

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.