Expert View: Focus on strong earnings rather than narratives; prefer BFSI, consumption: Joseph Thomas of Emkay Wealth

Stock market corrections should be utilised to buy into diversified portfolios for the long term, while short-term traders need to be more cautious, said Dr Joseph Thomas, Head of Research, Emkay Wealth Management. In an interview with Livemint, Thomas said that the Indian stock market valuations appear a bit stretched and investors should prefer opportunities that are backed by strong earnings rather than narratives. Here are edited excerpts.

Q. Will the market crash, as witnessed earlier this week, escalate further and how long will it last?

A. The last two times when the markets declined the fall was quite limited. The volatility seen around the exit polls and the subsequent actual results led to a fall in the markets from which the markets recovered quite fast. The most recent correction has been the result of a confluence of factors such as global growth concerns, geopolitical risks and also resulting from the unwinding of the Yen carry trade. Now couple the aforementioned factors with domestic valuations and there is a case that may lead to markets being volatile with a negative bias over the near term.

The markets recovered swiftly owing to the smooth liquidity conditions, and also due to the perception that the robust economic growth and the likelihood of easing of monetary policy over the coming months may offer planks of stability in the longer term.

Q. Is this the right time to indulge in ‘buy on dips’? What should investors’ strategy be amid this sell-off?

A. Any corrective downward movements may be opportunities to accumulate or invest more in the markets. For investors in managed portfolios, such as mutual funds, the rupee cost averaging has always been the best strategy. The sharp dips like the one we have seen recently should be utilised to buy into diversified portfolios. When it comes to short-term stock-specific trades, one needs to be more cautious.

Q. What are the safe pockets for investors to hide in such a market downturn?

A. The recent stock market correction is on account of the impact of global factors, or in other words, these factors are external or exogenous in nature. The economic fundamentals for the domestic economy and markets remain more or less unaltered.

One of the strategies may be to focus more on domestic economy-oriented themes and sectors, which includes domestic manufacturing. If global growth slows down, then some of the export-oriented sectors may see an impact on their earnings.

Q. Are you concerned about the stretched valuations of the Indian stock market? What are other key challenges?

A. The valuations appear a bit stretched when compared to the long-term averages, but we believe Indian markets will not become overtly cheap on a relative basis. The growth that India has to offer in a slowing global economy may command a premium. Having said that, the investors need to be more discerning going forward and look at opportunities that are backed by strong earnings rather than narratives.

Q. Which sectors are you positive on, and where do you see value in the market?

A. On a relative basis, BFSI is one sector that is reasonably valued. Consumption, though not necessarily cheap, can be looked at given the early green shoots of revival in rural demand and also policy focus on the same.

Q. What is your assessment of Q1 earnings so far? Which sectors are likely to be outliers and where can we see some notable upgrades and downgrades?

A. The earnings for Q1FY25 have seen slowdown as compared to the preceding quarter as well as the year ago period. BFSI has been the key contributor to earnings and even that segment has seen some slowdown. We do not expect major upgrades based on the results that are announced so far for Q1FY25; there may be some downgrades for export-oriented companies if the US goes through a slowdown and China continues to face growth challenges.

Q. How do you see the recent actions by the government of increasing capital gains taxes and Sebi’s new F&O norms impacting retail participation in domestic equities?

A. An investor would always prefer a low taxation regime, so there is no argument about what people would want. From a market participation perspective, we do not see any impact of the hike in capital gains tax.

Even as the new F&O norms are being discussed, we believe it is a step in the right direction. It would help serve the dual purpose of safeguarding investor interest to a certain degree and help curb the volatility.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.