By Kishor Ostwal

Investing in the market is favorable, whether it’s a bullish or bearish trend; what truly matters is the valuation of stocks. The recent state election results have triggered a significant surge in indices, causing apprehension among investors about their investment strategies. Even during bull markets, notable stocks like Infosys experienced a correction of 30-40% two quarters ago, and HDFC Bank is currently undergoing a correction of almost 20%. This emphasizes the importance of stock selection, as both of these stocks, despite being considered stalwarts, faced negative market reactions due to over-ownership and disappointing results.

Before delving into investment strategies, it is crucial to assess the valuations of indices. Ignoring this aspect may lead to the misconception that markets are overvalued and unsuitable for investment. Presently, the Price-to-Earnings (PE) ratio of Nifty stands at 23, while the one-year forward PE is just 19. Considering the 33-year average PE at 25, we are currently at a 24% discount to fair value, indicating room for an upward trajectory. With a GDP growth rate of 7.3% and an earnings trajectory of 25 to 30%, the valuation becomes compelling, providing ample scope for investment with desired returns.

Several other factors contribute to the positive outlook, such as the Indian government successfully managing fiscal deficits for three consecutive years. The fiscal deficit to GDP ratio for the last three fiscal years (FY21, FY22, and FY23) was 6.7%, 6.4%, and 5.9%, respectively. As the financial year concludes, the government aims to maintain fiscal discipline, potentially achieving a deficit of 5.9% or even lower, aided by unspent cash reserves of Rs 3.4 lakh. The possibility of lower market borrowings could be a pleasant surprise in the upcoming budget, positioning India favorably compared to global trends.

The market capitalization to GDP ratio, a global matrix of valuation, indicates that we are currently under control compared to the 33-year average. With risks mitigated and the current government likely to secure victory in the general elections, I recommend investors continue to focus on stocks with compelling valuations, aligned with their risk appetite.

I categorize markets into three segments: The Ocean, where stocks are matured but pose higher risks; The River, with valuations between 10 to 20 PE, offering decent investment opportunities; and The Ponds, the safest category for retail investors, characterized by stocks with lower ownership and trading at 5 to 10 PE ratios.

Considering sectors, I suggest investors explore opportunities in Engineering, Real Estate, Power, Auto, Auto Ancillary, Specialty Chemicals, AI, Defense, Metals, Oil and Gas, NBFC, UPI, Aggregators, Tourism, Cosmetics, SOLAR and Packaging. I advise caution with overbought banks and the Pharma sector, opting instead for upcoming companies with solid management.

Finally, I recommend a bottom-up approach, emphasizing early stock picking. Some potential stocks across various sectors ( in the sequence of sector recommended ) include Bhel, Alpine Housing, Tata Power, Tata Motors, Akar Auto, Vipul Organics, Inspirisys, Investment Precision, SAIL, BPCL, LTHF, Paytm, Zomato, Thomas Cook, MK Exim, GTV Engineering and RDB Rasayan. However, it’s crucial to conduct thorough due diligence, as equity markets inherently carry risks.

Currently, the most influential player in the Indian markets is the Government of India, given that the valuations of Public Sector Undertakings (PSUs) have exceeded 700 billion dollars. The surge in PSU stocks was notably observed after the Hon’ble Prime Minister’s statement in Parliament advocating the purchase of PSU stocks. In a more recent development, following the Ayodhya ceremony, the Prime Minister has expressed the vision of incorporating SOLAR roofs for one crore houses, prompting the inclusion of the SOLAR sector in the market theme.

The forthcoming budget presents an opportunity for the government to outline its fiscal priorities and spending allocations, potentially unveiling new sectors where increased investment is anticipated. Observing past budgetary trends provides insights into the government’s focus areas, and analysts and investors eagerly await these announcements for a comprehensive understanding of the economic landscape.

What sets the Indian economy apart is the concurrent momentum in both public and private spending. While the government plays a crucial role in infrastructure development, social welfare, and economic stimulus through its expenditure, the private sector also actively contributes through capital expenditure (capex). The private capex reflects investments made by businesses in expanding operations, acquiring new assets, or upgrading technology.

The synergy between government spending and private capex is a positive sign for economic growth. It suggests a harmonized effort to propel the economy forward, with the government setting the stage through its policies and investments, and the private sector responding with increased spending to capitalize on the conducive environment.

In essence, keeping a close eye on the budgetary announcements allows stakeholders to anticipate potential areas of economic expansion and strategic focus.