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Sell or SALE? 🛒

It was a brutal week for the markets, with the Nifty 50 falling by 3%. Even more brutal for mid-caps and small-caps, which fell by 6% and 8% respectively.

It’s almost like Santa came in and took away your things instead of giving you a gift. But wait, look at the bright side, it’s also like you got a massive end-of-the-year discount coupon.

Is it time to use your discount coupon yet?

Sorry, but you might have to wait for some more time (in our honest opinion)! Here’s why!

More rate hikes are coming: The Fed and RBI have lowered aggression on rate hikes, but rate hikes are not over yet. We must be off the peak on ‘aggression’, but we aren't off the peak on ‘hikes’. Hikes will continue threatening a sharp economic slowdown in the West, and some slowdown in India too. With a downside risk on corporate earnings, it is tough for the markets to continue their up-move.

China is waking up: Despite all the rising COVID cases, China is committed to making 2023 the year when its economy wakes up after three long years. China’s opening up is likely to solve some supply-chain issues which are currently contributing to higher inflation. However, a demand revival from China will also work the other way, and fuel higher demand - leading to stable-or-higher commodity prices. All that decline in the last few months may not last.

Valuations can't be ignored: India has been the best-performing economy, and even with lower growth, will remain so on a relative basis. However, valuations are sky-high - absolute and relative. Do current valuations justify the following?

  • Earnings growth of 13-15% for FY23/24, with a risk of downgrades

  • FIIs’ decision between buying into the most expensive market for the highest growth versus their decision to scout for markets with valuations beaten down by a recession

  • Visible interest rate increases will further push present values lower

Probably not!

💡 Our View: Although we are positive on the medium to long term, we see near-term headwinds making the current risk-reward equation unfavourable. We would use sharp downfalls to buy into stock-specific investments, which in our opinion have a larger potential for generating superior returns over the next year.

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