Frontline Stocks Seen Weighing Down At Higher Levels

Stock markets are seeing a consolidation. After many months of a higher closing, last month’s futures and options expiry cycle was the first to close at lower levels than its opening. Signs are pointing to a further consolidation. All the good news is now done and dusted. GST is behind us. Growth in earnings is also behind us, and the speculative frenzy normally seen during earnings season has whittled lower.

In any market that has run up so much, it’s but natural that stocks are going to get heavier at the top. It takes larger doses of cash inflows, and even dosages, to drive markets higher. Now money coming into the markets is tending to taper. And bears are taking the opportunity to gain an upper hand. Besides, some of the big bulls are on the phase waiting for the consolidation phase to pass by.

However, you may notice that despite tapering flows, the markets are holding out on its own at these levels. The correction so far has been well-behaved, and not wild and rough that tends to unnerve investors. If the market dips a little more, this is a time to buy at lower levels.

Global markets, too, moved in a range last week on the back of slowing foreign flows. The US Fed hinted a rate hike is on the cards, but did not specify when. But chances are that the US Fed is more likely to raise rate at the end of calendar year 2016, than in the next US Fed meet of September 2016.

Nevertheless, some hedged and some short-term money positions are being unwound. A few foreign investors may press some more sales the next few weeks to cut back exposure due to volatility in currencies. As a result, Indian markets may see churn in the coming weeks.

But once the initial hiccups are done with, foreign investors are likely to resume purchases once again. There aren’t many attractive investment zones in the global market. China is seeing a slowdown. The Eurozone is struggling with Brexit. Oil prices are stable, but a pick up investments in this major global sector is out of the question any time soon.

At this point, a correction is healthy. The Nifty is currently quoting at a PE of 23 times earnings. At these levels, the valuations are clearly above-average. A broad pick up in earning is just starting, and even if earnings grow by 15 percent in the next quarter, valuations will shrink lower to around 21-22 times earnings. Even at these levels, valuations stand at above-average levels.

Hence, investors have to choose their investments and their investments wisely. The days of a ‘rising tide lifts all boats’ scenario is over.

Consumption stocks are expensive, so is the finance and auto space. Sure, the demographic change is driving demand for bikes, finance and clothes, but stock prices are discounting earnings too far into the future. Hence, bid your time during a correction, and buy slowly in the current market.

Investors could, however, focus on banking, and select commodity stocks like steel. SBI is an interesting case study particularly as synergies in the merger will help cut back costs, at the same time expand markets. Banks like Kotak Mahindra are also deriving synergies due to their acquisition of ING Vysya.
Watch with stocks like GAIL, Mahanagar Gas, Indraprastha Gas on the utility space. Improving volumes and lower input prices is driving margins in this space.