Sensex, Nifty recover post 8-day fall: Should you buy or sell stocks?

Key indices Sensex and Nifty on Wednesday recovered from an eight-day fall, but the market valuations still look expensive and a few brokerage believe weakness may persist in the near-term.

Prabhudas Lilladher said it remains structurally positive on India growth story, given superior growth, favourable government policies and demographic dividend. "But near term uncertainties are rising  due to global geopolitical and economic issues, El Nino and negative noise levels ahead of 2024 General elections," it said while recommending investors to accumulate fundamentally strong companies in uncertain times.

Kotak Institutional Equities said it maintains its view of further time correction for the domestic market. It does not rule out price correction if domestic inflation was to surprise on the upside.

"It may be best to take a slightly longer-term view of the market and portfolios given the large uncertainty on certain key macro variables (inflation, interest rates) and rich valuations of the market and most stocks. We stay with our positive medium-term view on financials and investment," Kotak said.

Investors globally are now expecting longer-than expected interest rate hike cycle in the US. The dollar has firmed up recently, with foreign equity outflows from India hitting Rs 34,146 crore in the first two months of 2023. The earnings season that ended recently saw marginal cuts to FY23 and FY24 estimates. 

The domestic market appears expensive on an absolute basis as well as relative to history and bond yields currently, said Kotak Institutional Equities. The domestic brokerage said investors may have to reassess the short-term investment thesis for the market given two sudden shifts in market expectations.

The first is geopolitical tensions between China and the US, which may deflate the China reopening trade that came at the expense of India. Also, a likely higher interest rates in the US may derail the IT rally that was at the expense of financials in India, it said.

Investor interest in the equity market is weakening globally due to the slowdown, led by high inflation and contractionary monetary policy, said Vinod Nair, Head of Research at Geojit Financial Services.

Inflows, he said, are being diverted to safe assets, and corporate earnings growth is dropping, affecting the performance of the stock market and demanding downgrade in valuation.

"We find most of the better-quality stocks in the consumption, investment and outsourcing sectors trading at peak or near-peak multiples. Banks and financials are the only exceptions as they trade at reasonable levels, below their pre-Covid levels," Kotak said

Nifty is currently trading at 18.1 times 1-year forward EPS. In its base case scenario, Prabhudas Lilladher values Nifty at 7.5 per cent discount to 10-year average to arrive at 12-month target of 20,801.

In its bull case scenario, it values Nifty at 10-year average and arrived at a bull case target of 22,487. Meanwhile, in its bear case, Prabhudas Lilladher sees Nifty trading at 25 per cent discount to longer term average with a target of 16,866. 

Also Read: SGX Nifty down 34 points: Asian markets, dollar movement, FPI flows & more