Expert view: Nifty 50 may trade in a range; focus on THESE sectors in case of a correction, says Whitespace Alpha CEO

Expert view: Puneet Sharma, the CEO and fund manager at Whitespace Alpha, believes that while a correction of more than 10 per cent is not the most likely scenario, it is within the realm of possibility. He anticipates that the Nifty 50 will trade in a range of approximately 23,000 to 25,000. In an interview with Mint, Sharma discussed the triggers and challenges for the Nifty 50 and what sectors investors should buy in case of a correction in the Indian stock market.

Edited excerpts:

What is your short-term outlook on the Indian market? What range of return do you expect from Nifty 50 this year?

Looking at the Indian market in the short term, I'm cautiously optimistic.

We have had a solid run in recent months, fueled by strong corporate earnings, robust domestic consumption, and a supportive macroeconomic environment.

However, it’s important to recognise the potential headwinds, particularly from global economic uncertainties like inflation and geopolitical risks.

I anticipate that the Nifty 50 will trade in a range of approximately 23,000 to 25,000.

This range balances the positive domestic growth story and the global challenges that could weigh on market sentiment. Given the current dynamics, I’d estimate a potential return of around 6 per cent to 8 per cent by the end of the year, assuming no significant disruptions.

While the market is at high valuations, which could cap some of the upside, there’s still room for gains, especially if we see positive surprises in earnings or global economic conditions.

Should there be a correction in Nifty 50, can it be more than 10 per cent?

A correction in the Nifty 50 exceeding 10 per cent is possible, but it would likely require a significant catalyst.

Historically, 5-10 per cent corrections are common and can be healthy for the market, allowing it to consolidate before moving higher.

However, for a correction to exceed 10 per cent, we would need to see a confluence of negative factors—such as aggressive monetary tightening by the RBI, a sharp slowdown in global economic growth, or a major geopolitical event.

Given the current environment, while a correction of more than 10 per cent is not the most likely scenario, it is within the realm of possibility, particularly if global markets face significant headwinds.

However, it’s important to note that the Indian market has shown resilience in the past and often rebounds quickly from corrections.

So, while we should be cautious, we should also be prepared to capitalise on any such opportunities to invest in quality companies at more reasonable valuations.

What are the key short-term triggers and challenges for the Indian market that we should be aware of?

Certainly, several key factors could influence the Indian market in the short term, both positively and negatively.

On the trigger side:

1. Corporate earnings: The current earnings season is critical. Strong performances, particularly in sectors like banking, IT, and consumer goods, could drive the market higher. However, any disappointment could lead to volatility.

2. Monetary policy: The Reserve Bank of India's stance will be pivotal. If they maintain a dovish approach or consider rate cuts, it could provide a significant boost to market sentiment. Additionally, the actions of global central banks, especially the US Federal Reserve, will play a key role in shaping the market’s direction.

3. Festive season demand: With the festive season approaching, consumer-driven sectors are likely to see a surge in demand. Strong sales during this period could positively impact the market, particularly in sectors like automobiles, consumer goods, and retail.

4. Government policy announcements: Any new reforms or infrastructure initiatives from the government could act as catalysts. Investors will be particularly interested in policies supporting growth in manufacturing and green energy sectors.

5. Global economic developments: Stability or recovery in key global economies like the US, China, and Europe could positively impact Indian markets. Conversely, geopolitical tensions remain a concern, and any resolution could boost global risk sentiment.

On the challenges side:

1. Inflationary pressures: Inflation remains a key concern, particularly in food and fuel prices. If it continues to rise, the RBI might adopt a more hawkish stance, which could tighten liquidity and negatively impact market sentiment.

2. Global economic slowdown: Concerns about a potential slowdown in major global economies could weigh on Indian equities, particularly in export-oriented sectors. Additionally, if global central banks continue tightening monetary policy, it could lead to reduced liquidity and lower risk appetite among global investors.

3. Valuation concerns: Certain segments of the Indian market, especially mid and small-caps, are trading at high valuations. This raises the risk of a correction if earnings growth doesn’t meet expectations.

4. Foreign fund flows: The Indian market is heavily influenced by foreign institutional investors. Any reversal in FII sentiment could lead to outflows, particularly from sectors like financials and IT.

5. Political uncertainty: Political uncertainty could impact market sentiment and investor confidence with state elections in 2024.

Do you think the mid and smallcap segments in Indian markets are in a bubble? What should be our strategy for these segments?

The mid and small-cap segments in the Indian markets have certainly seen substantial gains over the past year, raising concerns about whether we might be entering bubble territory.

It's important to approach this with a nuanced perspective. While certain stocks within these segments have experienced sharp price increases, often driven by speculative trading or momentum rather than fundamentals, it would be overly simplistic to label the entire mid and small-cap space as a bubble.

There are still fundamentally strong companies in these segments with solid growth prospects.

The key is to distinguish between stocks that are overvalued due to hype and those that are genuinely positioned for long-term growth.

As for our strategy, a selective and cautious approach is essential. We should focus on companies with solid balance sheets, consistent earnings growth, and sustainable business models.

Diversification is also critical; we should avoid overexposure to any stock or sector.

A staggered investment approach can also help manage volatility, allowing us to average purchase prices over time.

In summary, while there are pockets of exuberance in the mid and small-cap space, there are still opportunities for disciplined, long-term investors.

How do you see India Inc.'s Q1 earnings? What are the key upgrades and downgrades?

India Inc.'s Q1FY24 earnings season has been mixed, reflecting both the resilience and challenges faced by different sectors in the current economic environment.

On the positive side, banking and financial services have shown strong earnings growth, particularly among private-sector banks.

These institutions have benefited from robust credit growth, improving asset quality, and better net interest margins.

As a result, we’ve seen upward revisions in earnings forecasts for key players in this space.

The IT sector has also performed well, driven by strong demand for digital transformation services and ongoing investments in technology across the globe.

Despite some concerns about the global economic slowdown, leading IT firms have reported solid earnings, leading to upgrades in their outlook.

On the other hand, the telecom sector has faced challenges, particularly due to competitive pressures and regulatory issues.

Earnings here have been underwhelming, leading to downgrades for some major players. Similarly, the FMCG sector has experienced margin pressures due to rising input costs, although demand has remained relatively stable.

The slow recovery in rural demand has also contributed to a more cautious outlook, resulting in some downgrades.

While certain sectors have outperformed, there are also areas of concern.

The mixed nature of Q1 earnings highlights the importance of a sector-specific approach to investing in the current market environment.

Warren Buffett has trimmed exposure in many stocks and reportedly holds a lot of cash. Does it indicate the market is overheated and could be heading for a deeper correction?

Warren Buffett’s decision to trim exposure and hold more cash certainly catches the attention of investors globally.

When someone like Buffett, known for his long-term value investing approach, decides to hold onto cash, it often signals a cautious outlook on the market.

This could indicate that he believes the market is overheated, with valuations running ahead of fundamentals.

Historically, Buffett has taken such a stance when he sees limited opportunities at reasonable prices, preferring to wait for better entry points.

This doesn’t necessarily mean a deep correction is imminent, but it does suggest that the market may be due for some consolidation or a pullback, especially if external conditions—like rising interest rates or global economic slowdowns—deteriorate.

For the Indian market, while Buffett’s actions are primarily focused on U.S. equities, the sentiment can spill over globally.

Indian equities, particularly those with high valuations, could face increased volatility if global markets correct.

However, this also presents opportunities for long-term investors to pick up quality stocks at more attractive valuations during any such corrections.

What sectors should one buy in case of a correction in the Indian market?

In the event of a market correction, certain sectors are likely to offer strong recovery potential and long-term growth opportunities. Here’s where I’d focus:

1. Banking and financial services: This sector is the backbone of the Indian economy. Private sector banks, in particular, have strong balance sheets and growth potential. In a correction, they might offer attractive entry points.

2. Information technology (IT) services: The Indian IT sector continues to be a global leader in digital transformation. Companies in this sector have strong revenue visibility and are well-positioned for long-term growth. A correction could provide an opportunity to invest in these high-quality stocks at better valuations.

3. Pharmaceuticals and healthcare: This sector is typically less affected by economic cycles and continues to benefit from strong global and domestic demand. It’s a defensive play with long-term growth potential.

4. Consumer goods (FMCG): The FMCG sector is another defensive play, with steady demand even during downturns. Companies with strong brands and distribution networks should perform well in the long run.

5. Infrastructure and capital goods: The government’s focus on infrastructure development positions this sector for long-term growth. A correction could offer attractive opportunities to invest in companies involved in infrastructure projects.

6. Renewable energy and green technologies: Given the global shift towards sustainability, this sector is set for significant growth. Investing in renewable energy companies during a correction could provide long-term gains.

7. Utilities: They offer stable returns and are less volatile during market downturns. They are a safe haven during corrections, providing consistent dividends and long-term stability.

A market correction can present valuable investment opportunities in sectors with strong fundamentals and long-term growth potential.

By focusing on quality companies within these sectors, investors can build a resilient portfolio well-positioned to benefit from the eventual market recovery.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.