Inexpensive or not, valuations ideal for building long-term portfolio

When we calculate the drop in Nifty’s trailing P/E during periods of major corrections over the last 12 years, the average drop has been 27.7%. Currently, the drop from October’s high is at over 29%. So even considering this data point, it seems that the valuations have mellowed down and are now starting to look attractive.

Having said that, India’s valuations relative to other emerging markets still are at a considerable premium. In fact, if we look at the valuations of broad emerging markets as well as developed markets, except the US, they are almost nearing pandemic lows. However, India has been quite resilient and our current P/E is also quite higher as compared to pandemic lows.

There is no doubt that the premium given to India is on account of the structural story, which despite all the macro hurdles, still appears to be strong.

India’s earning trajectory has not yet been completely de-railed and the fact that India is going to be the fastest-growing economy in 2022 speaks volumes about the Indian fundamental story. Considering the global macros, a strong positive catalyst may be needed to put a pause to this correction phase. Although current valuations do provide a good point to start building a strong long-term portfolio.

A bottom-up approach and an overweight stance toward largecaps should be the go-to strategy.

Event of the week
In order to control the rising inflation, the government announced an increase in the export and import duties of the commodities including steel and iron ore last weekend leading to the Nifty Metal declining by 8.14% in a single day.

This will act as a double whammy for the steel majors as on one hand, the hike in export duties makes their products incompetent in the global markets while on the other hand, they will need to even reduce domestic prices to dump the excessive supply.

Consequently, the top line, as well as the bottom line of these companies, will be dented. It is highly likely that the government may come up with more such measures to curb inflation. Even sugar stocks witnessed a similar drop when a restriction on sugar exports was announced this week. Considering the uncertainties and that these sectors are highly cyclical in nature, it’s best to avoid these at the moment.

Technical Outlook

ET CONTRIBUTORS

Nifty50 index closed mildly positive this week. The index continues to trade rangebound and seems oversold in the short term. Major developed and emerging market indices are exhibiting immediate term bottoming formations as well.

Further, a bullish reversal is quite evident in the banking index which has been outperforming the benchmark after bouncing from the rising channel support.

Considering these indications, the downside in Nifty seems limited up to 15,700. A decisive break above 16,400 can trigger a retest of 16,800-16,900 levels. Traders are therefore advised to maintain a bullish bias with a strict stop loss below 15,700 levels.

Expectations of the week
Market movement globally will be influenced by manufacturing PMI figures for China and the consumer confidence index of the USA. Back home, amid global recessionary fears, data on Indian GDP growth for Q4 FY22 is highly awaited.

Owning to commodity price spikes, the decline in wheat yields, and still some pressure on contact intensive services, it is widely expected that the GDP growth may be below its previous quarter. However, if growth falls short of projections, existing emotions may worsen.

Apart from the GDP print, auto companies will also be in focus as they release their monthly sales numbers. Considering these host data releases, the coming week will definitely be action-packed and investors are advised to maintain prudence with their trading picks.

Nifty 50 closed the week at 16,352.45, up by 0.53%.