Investors have a choice of expensive consumption-related stocks as they brace for near-term ructions arising from further escalation in China-US trade issues and HFC-real estate liquidity/credit issues and inexpensive stocks elsewhere if they are willing to live with near-term market volatility and take a two-three-year view.
The sharp decline in stock prices in general provides some opportunities for bottom-picking in non-consumption stocks for investors willing to live through near-term issues such as China-US trade and housing finance companies (HFC)-real estate credit situation. Consumption-related stocks continue to trade at rich multiples with growth challenges and thus, could see a period of further consolidation and de-rating of multiples. Meanwhile, domestic growth and earnings downgrade challenges persist.
More choices but more confusion, too The sharp correction in stock prices over the past three months (as many as 104 stocks in our coverage universe have fallen more than 10% in the past three months) provides opportunity to investors to revisit stocks in general. Investors have a choice of expensive consumption-related stocks as they brace for near-term ructions arising from further escalation in China-US trade issues and HFC-real estate liquidity/credit issues and inexpensive stocks elsewhere if they are willing to live with near-term market volatility and take a two-three-year view.
Whether to buy
The valuations of the broad market are more reasonable relative to historical valuations and bond yields. The valuations of the non-consumption parts (value) of the market have become fairly attractive and investors willing to overlook near-term issues can look at buying these stocks. Some of these are global commodity, NBFC and PSU stocks with their own challenges. Things could unravel further based on aforementioned risks in the short term but stocks are already pricing bleak outcomes in several cases. The consumption-related (growth) stocks are still quite expensive and we would expect these stocks to go through further consolidation and de-rating of multiples, especially if domestic economic growth was to remain subdued.
When to buy
We note the following risks in the short term—(1) continued slowdown in the Indian economy and the government’s limited ability to reverse the slowdown given no scope for fiscal stimulus, inefficacy of monetary stimulus and no structural reforms as yet, (2) earnings downgrades; we see 18% growth in net profits of the Nifty-50 Index versus 24% at the start of 1QFY20 results season and (3) the ongoing HFC-real estate liquidity situation deteriorating into defaults by certain HFCs and real estate developers on further slowdown in the residential market.
What to buy
We would recommend a judicious mix of (1) consumption-related stocks (including high-quality financials) to tide over near-term uncertainty; they will hold up better perhaps in the case of some of the above mentioned risks playing out although they are unlikely to give large absolute returns for some time and (2) inexpensive stocks elsewhere; they may see a quick rebound if China-US issues were to be resolved over the next few months and the Indian government was to implement credible policies to reverse the ongoing economic slowdown. Even otherwise, these stocks will likely give decent returns over two-three years as India’s economic situation improves and the companies fix their problems through self-help measures (manage costs).
(Edited extracts from Kotak Institutional Equities Research report)