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Business News/ Markets / Stock Markets/  Nifty, Sensex today trade volatile, mid and smallcaps crack up to 4%. What should be your strategy for short term?

Nifty, Sensex today trade volatile, mid and smallcaps crack up to 4%. What should be your strategy for short term?

Indian stock market benchmarks Sensex and Nifty traded volatile on Tuesday while the midcap and smallcap indices saw a strong selloff.

Sensex and Nifty traded volatile while the midcap and small-cap indices suffered strong losses on Tuesday. (Pixabay)Premium
Sensex and Nifty traded volatile while the midcap and small-cap indices suffered strong losses on Tuesday. (Pixabay)

After seven consecutive sessions of gains, market benchmarks the Sensex and the Nifty appear to have lost steam as both traded volatile on Tuesday amid lingering concerns over sticky inflation, higher interest rates, and a slowdown in global economic growth.

Sensex opened 380 points higher at 67,506.88 against the previous close of 67,127.08 and swung between gains and losses through the session. The index took a swing of 591 points during the session, hitting the intraday high and low of 67,539.10 and 66,948.18 respectively.

Nifty, on the other hand, opened at 20,110.15 and scaled a fresh record high of 20,110.35 during the session. But it failed to hold altitude and suffered strong bouts of volatility during the session.

Sensex closed at 67,221.13, up 94 points, or 0.14 per cent while the Nifty closed the day at 19,993.20, down 3 points, or 0.02 per cent.

On the other hand, early morning today, the BSE Midcap and Smallcap indices hit their fresh record highs of 33,245.85 and 38,769.33 respectively but witnessed a strong selloff after that.

The BSE Midcap index fell to an intraday low of 32,052.46, down 3.06 per cent against the previous close of 33,064.96 while the Smallcap index plunged to its intraday low of 36,931.57, down 4.16 per cent against its previous close of 38,533.40 in Tuesday's trade.

The BSE Midcap index finally ended with a loss of 2.96 per cent at 32,084.93 while the BSE Smallcap index plunged 4.02 per cent to end at 36,982.74.

Read more: Stock market today: Midcaps crack 3%, smallcaps plunge 4% as stock market sentiment turns negative

Why is the market falling?

As of September 11 close, benchmarks the Sensex and the Nifty have each gained over 10 per cent this year while the BSE Midcap index has surged nearly 31 per cent and the BSE Smallcap index has jumped 33 per cent in the same period.

Given that many positive factors have already been factored into the market, and with the ongoing risks of inflation, elevated interest rates, a global economic slowdown, and the continual increase in the dollar index and US Treasury yields, the recent market rally was anticipated to be short-lived.

Due to the sharp rise in the market, especially the mid, and smallcap space, the valuations have inflated.

Lofty valuations?

At present, the PE (price-to-earnings ratio) of the Nifty is near 23 which is above its two-year average PE but it is still below its five-year average PE of 26.26. Experts say the Nifty50 PE getting closer to 25 is not a good sign and investors should be cautious.

Anita Gandhi, Director at Arihant Capital pointed out that Nifty is trading at a trailing price-to-earnings (PE) ratio of 23.26, with a dividend yield of 1.39 per cent and a price-to-book value (P/B) of 2.98. The forward PE ratios for FY 24 and FY 25 are 20.8 and 18, respectively.

On the other hand, Sensex has a trailing PE of 23.71, a dividend yield of 1.35 per cent, and a P/B of 2.95. The forward PE for FY 24 stands at 21.73.

In comparison, the Dow Jones index in the United States trades at a trailing PE of 21.13 and a one-year forward PE of 18.75, while the S&P 500 exhibits a trailing PE of 22.2 and a one-year forward PE of 20.15.

Gandhi said these figures indicate that India's benchmark indices currently have slightly higher valuations than their global counterparts. However, she added that India has higher growth prospects than many international peers. The critical consideration is whether the underlying companies' earnings can substantiate this growth. The current valuations can be considered reasonable if earnings align with growth expectations.

"While the current market valuations in India may appear slightly elevated compared to global benchmarks, the country's robust growth potential can justify these valuations. The fundamental factor to watch closely is whether the earnings of the companies listed on these indices can support and validate the projected growth, ultimately determining the sustainability of these valuations," said Gandhi.

Srikanth Subramanian, CEO of Kotak Cherry warns investors should exercise caution when treading in the market.

"Nifty 50 PE now goes closer to 25, which by any standard isn't cheap. While markets are aggressive in terms of valuation, midcap and small-cap stocks in particular, investors should clearly stay away from noise and make an informed choice. Meanwhile, the trajectory for broader markets from here onwards will depend on corporate earnings, inflation and interest trajectory, Oil Prices and of course the geopolitical situation, all of which, at this stage, augurs well for India," said Subramanian.

Market correction possible

Market experts expect the market to correct now. However, most of them do not expect it to correct deeply.

"We are expecting a decent correction in the equity market in the near term because markets are near their all-time high levels, but we do not expect any deep correction in the Indian equity market because economic activity in India is strong," said Arvinder Singh Nanda, Senior Vice President at Master Capital Services.

Shrey Jain, Founder and CEO of SAS Online believes the market may see a correction but it's unlikely to be sharp. He expects the Nifty to stabilize around the 19,400 mark.

What should investors do in the short term?

Gandhi advises considering allocating investments to sectors with growth potential, such as capital goods, power, fertiliser, and the sugar sector. However, it's crucial to closely monitor valuations to ensure that you're entering these sectors at reasonable prices, she said.

Additionally, Gandhi said consider taking profits in stocks that have surpassed their fundamental valuations unless there's a compelling reason to anticipate a substantial re-rating.

"Prudent portfolio management involves balancing potential opportunities in declining markets with a disciplined approach to valuation and risk assessment," said Gandhi.

Jain of SAS Online said in the event of any market correction, public sector undertakings can continue creating wealth over the long term. "The economy-centric sectors have rebounded post-Covid, showing strong growth potential as these stocks are doing well and their PE is still less," said Jain.

Manish Chowdhury, Head of Research at StoxBox advises investors to keep an eye on large-cap space as well as the risk-reward has become favourable for the IT sector and a few heavyweights such as Reliance Industries, HDFC Bank and ITC.

Nanda advises one can adopt a 'buy-on-dips' strategy at this juncture. "One should stay invested in the market and adopt a strategy during substantial dips as an opportunity. One can invest in fundamentally sound companies," he said.

Nanda advises investing in the IT sector as he underscored the IT industry has recently moved towards more modern technologies such as cloud computing, artificial intelligence and the Internet of Things.

"Positive government policies, availability of skilled workforce and rising demand for technology are expected to lead to continued growth in the Indian IT industry in the coming year," said Nanda.

Other than IT, Nanda is positive about the electric vehicles and FMCG sectors.

"India is on the verge of an electric vehicle revolution, with the government and the private sector working together to create an economic ecosystem," said Nanda.

"FMCG is a long-term investment in India. Significant growth of e-commerce and digital marketing in the Indian FMCG industry is another trend. Due to the rise of online shopping that directly connects consumers, many FMCG companies are investing in e-commerce platforms and digital marketing. Many of the products in this industry have been used by people for over 100 years and will continue to be used in the future," Nanda said.

Amit Goel, Co-Founder and Chief Global Strategist of Pace 360 believes the peak of the market may be a few weeks away from here.

However, he said the current euphoria is unsustainable and once the peak is established, the market may see major reversals over the next three years.

"If there is a correction before we make the ultimate peak, we would want to buy blue chip stocks like RIL and private banks. However, once we are convinced that the markets have peaked out, we would refrain from buying the dips unless there is a deep correction," said Goel.

Read all market-related news here

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

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Published: 12 Sep 2023, 01:39 PM IST
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