After the sharp equity market correction, rising number of bluechip companies are currently trading at a significant discount to their historic valuations. The price to earning ratio (P/E) of about two third of the 45 bluechip companies?those with a market cap of more than R25,000 crore?are currently trading at a discount to their five-year averages, according to data complied by FE. Equity markets as measured by BSE Sensex has corrected about 20% since the start of the year.
“During sharp corrections, even stocks of fundamentally sound companies get battered along with broader market without any real reason which in turn could be a good long-term buying opportunity? says Andrew Holland, CEO-Investment Advisory, Ambit Capital.
Recently, some of the private sector banks have been hit hard which may turn out to be good bets especially if we see any pause or decline in the interest-rate cycle, he says. As of today opportunity to invest in beaten-down bluechip stocks are available across sectors. Many of these bluechips are from sectors of real estate, banking, IT, materials, capital goods and cement.
Investing in bluechips during downturn is a well-known investment strategy. A slightly different version of it is the famous ‘Dogs-of-the-Dow approach whereby investors scout for high-dividend yielding stocks from the Dow Jones Industrial Average. This is largely considered a lesser riskier investment strategy given that bluechip companies have a better ability to tide through economic downturns than the mid or small sized companies.
However, back home some investment experts believe that the investment strategy at this point of time should be of maintaining a balanced asset allocation rather than taking fresh exposure in equities given the global uncertainties and higher domestic inflation.
Gopal Agarwal, head of equities at Mirae Asset management says, ?The Sensex is currently trading at 12.5 times its one year forward earnings compared to its historic multiple of 14.7 indicating that a lot of large cap stocks are trading at a discount to its historical valuations.?
However, we believe that the inflation may not see a meaningful correction for the next one year while the concerns over global slow-down and its impact on India may intensify further. Hence, the market continue to remain under pressure until this scenario improves,? he added.
According to latest Credit Suisse report, corporate leverage has not improved and number of companies with high leverage are now more than in FY08. “Moreover, about 50% of globally-linked Nifty EPS that was largely uncut so far, may see downward revisions,” the report said. ?We reiterate that we are at the beginning of a period of uncertainty globally, and it is far from the end.? the report added.
