As the market continues to navigate uncertainty, with global trade tensions, US recession concerns, and the ongoing impact of the COVID-19 pandemic, it’s essential to reassess the valuation concerns in the market. While large-caps have corrected significantly, some investors are questioning whether valuations are now more reasonable.

Valuation Concerns

• Large-caps are now trading at more reasonable valuations after a 15% correction and a 25% decline in the broader markets over the past six months.
• However, markets can go above or below fair value, and historically, when markets are undervalued, they eventually become overvalued.
• Some sectors, such as banking and financial services, are trading at reasonable valuations, but the market’s perception of their prospects is a concern.

Despite the attractive valuations, some sectors, such as banking and financial services, are not receiving the love they deserve. The banking sector has been one of the best performers in the recent market correction, and some analysts believe the best of the banking story is behind us.

US Recession Concerns

The US economy, which has been the global growth engine since 2012, seems to be losing momentum. A slowdown appears imminent, but it’s uncertain whether this will culminate in a full-blown recession.

The sharp rise in US bond yields is a concern, as it signals that global investors may be losing confidence in US debt as a safe haven.

The RBI has cut interest rates twice and has been infusing liquidity into the system since December via OMOs. However, some experts argue that the RBI should do more to jumpstart bank lending and the economy.

Domestic Macroeconomic Situation

India’s macroeconomic situation is looking positive, with the rupee strengthening, GDP growth estimated at 6.5%, inflation under control, and GST collections healthy.

However, the bigger challenge has been the global environment, which has not been very supportive.

Many internet and e-commerce companies are entering the primary market at extraordinary valuations, which raises concerns about the attractiveness of these investments.

Investment Outlook

We are broadly positive on India’s macroeconomic outlook, but we are also mindful of the risks arising from global factors.

We will be closely watching how these factors impact India’s domestic economy and adjusting our views accordingly.

As for investment styles, we favour quality and earnings revision-based momentum styles.

We have always been strong believers in a contrarian approach for long-term investing.

Instead of focusing on specific sectors, we emphasise asset allocation. A well-diversified portfolio across equities, debt, commercial real estate, and other assets is essential.

We also urge caution when investing in unlisted equity, micro-caps, and small-cap stocks.

Six months ago, we were more positive on banking, financial services, and insurance, but since then, these sectors have outperformed most other sectors.

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