Share market valuations stretched but indices hold firm; wait for correction or deploy cash?

NSE Nifty 50 is trading at a stretched PE ratio of 40.93. Meanwhile, on a one-year forward basis valuations seem rich at 22.3x FY22E.
(Image: REUTERS)

NSE Nifty 50 is trading at a stretched PE ratio of 40.93. Meanwhile, on a one-year forward basis valuations seem rich at 22.3x FY22E. Despite this, stock markets continue to remain unscathed and hover closer to the all-time highs. Is it now time to pull money out of equities and wait for a correction? “Since near term valuations are still very much on the higher side it is not wise to expect healthy returns in less than one year,” Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities, told Financial Express Online.

Sceptical but not bearish

Nifty 50 has doubled from March 2020 lows, running ahead of the economy which is just out of the woods of a technical recession. However, analysts are not bearish as of now, but are only cautioning investors and urging to deploy cash gingerly. Analysts believe that domestic markets are looking forward and expecting a strong recovery for the Indian economy, propelling earnings growth. Rusmik Oza said that a massive stimulus is likely to continue in 2021 along with a strong V-shaped economic recovery, which should provide support to the market at lower levels.

“Markets are anticipating that from the financial year 2022 second half onwards we would see recovery in earnings that would help support the valuations,” said Ajit Mishra, VP-Research, Religare Broking. Investors would now face a tough time picking stocks, he added. “The market might inch higher but from here on it won’t be an easy ride for investors,” Ajit Mishra said. Analysts do believe Dalal Street could be in for a consolidation phase over the next few months and only break out on the higher side as investors look forward to the fiscal year 2023 earnings.

How to trade from here

Long-term investors should now remain invested but avoid lump-sum purchases, according to Likhita Chepa, Senior Research Analyst at CapitalVia Global Research. “New investors are advised to take positions at dips or corrections rather than buying at higher levels,” she added. Sensex and Nifty have seen corrections on their way to the top, and Rusmik Oza believes buying the dip is the correct way forward. “India has become a good buy on dips market because of its own strength and low base of last year. Hence, it is ideal to use any future corrections to accumulate stocks with a 2 to 3-year view,” he said.

Ajit Mishra advises investors to go for theme-specific trades. “IT is stable and FMCG, so defensive sectors, after correction have some opportunities. Metal stocks have done good and investors should book profits and wait for some dip while being selective,” he said.

(The stock recommendations in this story are by the respective research and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)

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