Large-caps preferred as market faces pressure; BFSI, healthcare among favoured sectors
Kotak Securities expert Shrikant Chouhan recommends large-cap stocks, BFSI, and healthcare as market faces pressure from FII selling and global yields.
As the Indian equity market continues to navigate a turbulent period, seasoned experts are suggesting a shift in strategy toward stability. Shrikant Chouhan, Head of Equity Research at Kotak Securities, has highlighted that large-cap stocks are currently better positioned to withstand ongoing market volatility and possess the potential for a sharp rebound should investor sentiment improve.
The market has endured significant strain for nearly eight weeks, with the Nifty witnessing a notable decline from the 24,500 levels down to the 22,400-22,500 range. This downward trajectory has brought the market back to levels reminiscent of April 2024, according to Chouhan.
The FII Exodus and Global Competition
A primary driver of this recent weakness is the aggressive selling by Foreign Institutional Investors (FIIs). In a span of just four to five days, foreign investors offloaded nearly Rs 30,000-35,000 crore from the Indian markets. Several factors are contributing to this shift in capital:
- Global Bond Yields: Higher yields are making bonds more attractive than equities for foreign players.
- Emerging Market Competition: Markets like South Korea and Brazil are currently offering a more compelling combination of earnings growth and reasonable valuations.
- Relative Attractiveness: While India's earnings growth remains decent, it is currently perceived as less attractive compared to other markets offering better momentum and growth multiples.
Why Large-Caps are the Safety Net
Chouhan warns that mid- and small-cap stocks might face intensified pressure, particularly if interest rates continue to rise. In contrast, large-cap companies offer a defensive advantage. Because they are backed by stronger fundamentals, they tend to experience smaller corrections during market downturns and are primed to "bounce back sharply" once positive news begins to flow.
Currently, the market is trading at approximately 16 times FY28 earnings. Notably, nearly 80 per cent of Nifty 50 stocks are trading below 20 per cent of their fair value, suggesting that quality large-cap names are becoming increasingly attractive on a valuation basis.
Preferred Sectors for Medium to Long Term
While the broader market faces headwinds, certain sectors stand out as potential winners for investors looking at a medium to long-term horizon. Chouhan identified the following areas of interest:
- BFSI (Banking, Financial Services, and Insurance): Despite potential short-term pressure from higher interest rates on lending activity, the sector remains positive due to its robust fundamentals.
- Defence: This sector is expected to benefit from sustained government support and a continued upward trend in capital expenditure.
- Healthcare and Pharmaceuticals: Identified as strong long-term opportunities.
- Hotels and Tourism: The hospitality sector is expected to see increased traction in the coming period.
Key Risks to Watch: Crude and Yields
The path to recovery remains contingent on several macroeconomic variables. Chouhan pointed to crude oil prices and bond yields as the most critical risks for the equity market. If crude oil prices hover around USD 100-105 per barrel, inflationary pressures could intensify. Conversely, a drop toward USD 90 could help stabilize inflation within the 4.8-5.2 per cent range.
As the market sits at what Chouhan describes as an "inflection point," all eyes are now on upcoming corporate Q2 results. While earnings are expected to align with estimates, the management commentary provided during these results will be the deciding factor in determining the market's future direction.