The Indian stock market has seen a bit of a slump recently, especially in smaller and mid-sized companies (SMIDs). But Emkay, a leading financial firm, says this is just a temporary blip and there’s no need to hit the panic button.
Correction due to high valuations and liquidity concerns: The recent drop can be explained by two main reasons. First, some stock prices were simply too high, and a correction was inevitable. Second, there are concerns about the availability of cash for investing in SMIDs.
Manufacturing and Investment to Drive Growth: Emkay sees a shift in the Indian economy from focusing on things we buy (consumption) and services towards making things (manufacturing) and investing. This benefits companies involved in manufacturing, which are mostly SMIDs. The government is also expected to continue supporting this trend.
“This shift has resulted in a redistribution of the incremental profit pool away from sectors such as banks, fast-moving consumer goods (FMCG), and Information Technology (IT), which are dominant in the large-cap universe. Conversely, manufacturing sectors, which are predominantly composed of SMIDs, have played a significant role in propelling the market’s rally. This trend is expected to remain a focal point of government policies, and any significant change in incremental growth is unlikely in the near future. SMID rallies are inherent to the market, characterized by higher volatility and often accompanied by inflated valuations, followed by rapid and pronounced corrections, similar to the current one,” the brokerage added.
The target for the Nifty remains steady at 24,000, based on LTA Nifty P/E as the anchor. Emkay’s overweight sectors include consumer discretionary, materials, and industrials, while they are underweight on financials, IT, and FMCG sectors. Among the ‘fallen angels’ in their model portfolio, their top picks are Ambuja Cements, TVS Motor, and Zomato. Additionally, Emkay perceives this market correction as an entry opportunity for its small-cap selections, all of which have experienced significant declines in value.
Bounce Back Triggers: Emkay expects the market to rebound in the next 1-2 quarters due to several factors. This includes a potential win for the NDA party in the upcoming elections, a reform-focused budget from the new government, and potential monetary easing from the central bank.
The Takeaway: While the market might be shaky right now, Emkay believes it’s a good time to “buy the dip” in the right stocks, especially smaller companies with strong growth potential. The only precaution is to steer clear of small and medium-sized stocks with elevated valuations.
Despite being slow performers during the ascent, sectors like staples, telecom, and materials experienced significant declines. Meanwhile, mean reversion played out for the energy and real estate sectors. Utilities notably excelled, showing strong performance in both positive and negative market movements.
First Published: Mar 27 2024 | 9:01 AM IST