After the Sensex reacted wildly to the global sell-off on Tuesday, and closed at one month low of 34,195.94 and wiping away Rs 2.7 lakh crore, Saurabh Mukherjea of Ambit Capital says that the markets are still overvalued and he expects the overvaluation to get cleansed out by year-end. According to him, a correction of 15 percent could bring things to a stable footing. “We are just beginning the fall..hard to know how far this market will fall, but if largecaps fall around 15 per cent and smallcaps and midcaps fall around 30 per cent, we get to some semblance of sanity on valuations,” Saurabh Mukherjea told ET Now.
According to the expert, the cause for a fall in India could be LTCG tax while for US markets it could be a rise in bond yields. A recent Goldman Sachs report says that pullback in the United States stock market indices was overdue. “History suggested the S&P 500 was overdue for a pullback: 404 trading days had elapsed since the market last experienced a 5 percent drawdown, the longest stretch of time in nearly 90 years! Since 1929, pullbacks of 5 percent have occurred after 92 days, on average,” Goldman Sachs observed.
While Saurabh Mukherjea doesn’t see value in the market at current levels, he says that select IT and pharma stocks are slated to see traction. “Look for openings in high quality sectors like IT and pharma, where frontline names have historically been successful with high ROCs, high cash flows. Those openings in IT and pharma are still there. We have been supporting buying those sectors in last six months. I think that stays. But generally for the market as a whole, I do not still see value in the market as a whole,” Saurabh Mukherjea said.
According to Saurabh Mukherjea, an economic recovery may benefit largecap stocks going forward. “In my reckoning, as signs of an economic recovery take hold, and hopefully that will be more visible in Q4 results and in the H1 of next financial year, it will help largecaps. I am not so sure about smallcaps and midcaps, because inflation is back; CPI inflation is above 5 per cent and all the indications are, CPI inflation will stay high through FY19,” the expert noted.