The current market correction is deemed as a buying opportunity by some experts with the benchmark indices dipping below their long-term valuation measures.
However, it may not be an easy task for investors to choose between the interest rate-sensitive pack and defensive stocks. For both groups are facing peculiar challenges like tepid volume growth, dear valuation and slower pace of interest rate cuts, amid a sluggish economy.
Market observers say short-to-medium-term investors may continue to flock towards defensive stocks from the consumer goods, pharma and IT space despite relatively high valuation on some counters. ?On the other hand, the current market correction has given opportunity to strong blue chips across sectors that can be obtained by a bottom-up preference for longer investment horizon,? said Future Generali Life Insurance CIO Nirakar Pradhan.
As the benchmark indices nosedived to their seven-month low, the 30-share Sensex is currently trading at 12.3 times its estimated earnings for fiscal 2013-14, a steep discount of more than 15% to its long-term average. Nonetheless, the leading counters from defensive space like pharma and consumption goods are currently seen trading at a premium to their three-to-four-year average valuations.
For example, Asian paints is currently trading at a huge premium of 55% to its average price-to-earnings ratio for the fiscal since 2009. Similarly, pharma stocks like Sun Pharma, Dr Reddy?s and Ranbaxy are trading at superior PE multiples. Even IT stocks like HCL Tech, Infosys and TCS have maintained expanded valuations.
As per a mutual fund manager, even as rate-sensitive sectors, including financials and auto, are likely to earn prominence in the next 1-2 years given the looming interest rate cuts, the historic behaviour of the last three years show that in the short-term, investors are likely to move towards defensives.
?Investors are not comfortable with earnings growth of certain sectors; hence, valuation discount doesn?t matter for such companies. Instead, they are willing to herd towards FMCG companies that are not valuation supportive, but seem to offer prospects on the back of healthy earnings,? he added.
As per a latest note by Credit Suisse, the broader market doesn?t look attractive yet as FY14 earnings have around 10% downside, and large sectors, such as financials, can still correct meaningfully. Although the brokerage cited the current correction to be broader than those seen recently, it has raised weightage of utilities, materials and energy and reduced exposure to HUL in its model portfolio. ?We continue to expect the highest downside in financials and industries,? the note said.
Interestingly, in the last six sessions of April in which the market corrected by 4%, at least seven defensive stocks from BSE 500 universe touched their all-time highs, wheras 60% of the stocks that touched their 52-week low belong to high-beta sectors, including infra, financial and metals space.