Clueless market eyes policy measures; invest in largecaps that corrected in July

Rajeev Srivastava

A persistent offloading by foreign portfolio investors (FPIs) after the budget proposed a higher surcharge has left the Indian equity market jittery, with the BSE Sensex and the Nifty losing over 6 percent and 7 percent, respectively, in July.

FPIs have sold equities over US$1.7 billion in the Indian market, marking the highest outflow in the last 10 months. The market undertone continues to remain jittery.

A slowdown in consumption and absence of any remedial measure in the recent budget to revive growth has not gone down well with the investors.

The market is eagerly looking forward to some sort of stimulus by the government to kick-start growth, without which it will be difficult for corporates to report sustainable growth in the absence of a pick-up in private capex.

Dismal corporate performance has led to a de-rating in the Indian equity market after a span of more than 15 years. Mid and small-cap stocks continue to face the brunt of the market following concerns over growth.

Slow growth in Q4FY19 took a toll on corporate earnings, as BSE 500 companies registered an average growth of negative 5 percent (ex-BFSIs).

Similarly, corporate earnings in Q1FY20 do not look encouraging, so far. An average earnings growth of more than 520 companies stood merely at sub-5 percent (including banks).

Measures such as higher capital infusion (Rs 70,000 crore) in the public sector banks and impetus for the NBFCs revival via one-time partial credit guarantee (for six months) for first loss of up to 10 percent to PSBs for purchase of high-rated pooled assets of financially sound NBFCs (up to Rs one lakh crore during FY20) are not considered sufficient to revive the ailing micro, small and medium enterprises (MSMEs).

Notably, as the MSMEs contribute over 30 percent to India’s GDP, it is a matter of utmost importance for the government to take remedial measures to bolster segmental growth.

In a scenario of a global slowdown and resultant shrinkage in exports, domestic consumption must pick up to support the economy.

Given the least chance of hardening of commodity prices due to global phenomena and benign inflation scenario, the Reserve Bank of India (RBI) will essentially propel more rate cuts.

Nevertheless, we understand that NDA 2.0 with a full majority is committed to delivering high growth and will take required measures in due course.

However, the market may remain volatile in the interim period until it really sees any sign of economic revival and visibility of better earnings growth.

Most of the times, we have been advising to invest in quality mid-cap stocks with better earnings visibility and sound corporate government.

However, only a few select large-cap stocks, which have corrected a lot in July 2019, offer decent risk-reward proposition. We advise investors to selectively look at those stocks.

Investment in passively managed funds like ETFs (especially low volatility and income paying) also appears to be prudent, given low total expense ratio and proven track record during volatility.

(The author is Head Retail Broking, Reliance Securities)

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