Market Correction Forecast:
– Frontline indices are predicted to face a potential correction of 5-10%.
– Small- and mid-cap stocks may experience more significant declines.
Emkay Global’s Cautious Stance:
– The brokerage has initiated a “key avoids” list due to concerns over inflated valuations.
– Nifty valuations are currently high, and the market has already priced in a positive budget.
– A lack of favorable market triggers and a tepid Q1FY25 earnings season could prompt a sell-off.
– Anticipated rate cuts only by the end of CY24 are expected to add to bearish sentiment.
Valuation Concerns:
– The Nifty is approximately 10% above its five-year historical mean, trading at 21.4x 1YF PER.
– NSE Midcap 150 and NSE Smallcap 250 valuations are 52.5% and 35.5% above their respective five-year averages.
– Even with strong growth prospects, current valuations suggest potential for a near-term correction.
– Significant upward revisions in forward estimates would be needed to justify such high multiples, which are not expected in the next 1-2 quarters.
Sectors and Stocks at Risk:
– Industrials: Likely to lead the correction due to high valuations.
– Financials: Most liquid and also expected to experience a downturn. Emkay’s underweight stance is reflected in its views on HDFC Bank and SBI Cards, anticipating a derating for both.
– Durables, especially Autos: Also vulnerable to declines.
Sectors to “Hide” In:
– Staples
– Energy
– Technology (in that order of preference)
Stocks Added to “Key Avoids” List:
– Eicher: Due to concerns over product positioning and high valuations.
– L&T Technology Services: Considered overvalued compared to other large-cap IT services companies, with expectations of a weak FY25.
– PI Industries: Valuation is not yet justified by its projected sub-5% EPS growth for FY25/FY26.
Long-Term Outlook:
– Despite the anticipated sell-off, Emkay Global remains positive on India’s long-term prospects.
– The brokerage plans to increase its market exposure following a meaningful correction.
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