How large-cap stocks can offer a buffer against heightened volatility?

In the past two months, FIIs have been selling ahead of the upcoming election results, while retail investors remain cautious with a bias on investing in mid and small-cap stocks. Meanwhile, DIIs are accumulating shares, resulting in minor buoyancy in the broader market. The overall tendency of investors is to sell in a rally. The market is not able to breach the new high, which will be decided on the 3rd of June, the exit poll result date, whether to scale up or down. Additionally, the recent lower voter turnout is adding to market uncertainty, possibly due to heatwave or voter fatigue with the Modi aura. 

The Q4 earnings have exceeded expectations, but the market anticipates a moderation in the earnings outlook for FY25 compared to FY24. However, there is potential for an upside to this conservative forecast of 15% EPS growth, like what occurred in FY23, due to a strong GDP growth projection of over +7%. Sector wise, positive momentum is evident in FMCG and auto stocks, driven by expectations of a revival in rural demand in H1FY25. The FMCG sector is anticipated to see improved performance as the IMD has predicted a normal monsoon, which should drive strong agriculture and reduce input prices. Conversely, PSU banks are underperforming in the short term due to the RBI’s tighter lending norms for projects under development. 

In April, key domestic economic indicators such as GDP, manufacturing and service PMI, auto sales, and industrial output remained positive. Moreover, domestic CPI inflation showed signs of easing, which is viewed positively for future RBI policy adjustments, potentially paving the way for a rate cut. Loan growth at scheduled commercial banks remained in double digits. Economic indicators continue to be robust, indicating that the Indian market should sustain its buoyancy. However, since the market currently anticipates a slowdown in earnings growth, its playground is mixed on a stock to sector basis. Profit booking is emerging at higher levels. The Nifty Midcap Index is trading at a P/E of 28x, a 46% premium to large caps. While the Nifty50 Index is trading at P/E of 19x, ~7% premium to the long-term average. Suggesting that large caps are a safer bet in a volatile period. 

Globally, the US Federal Reserve remains hawkish policy, prioritizing inflation to downcycle first. FIIs are sellers given delays in rate cuts, lower voter turnout, and a premium valuation of India compared to EMs. Large-cap stocks are expected to offer a buffer against heightened volatility. Positive trends are observed in sectors such as manufacturing, capital goods, infrastructure, and energy, which are GDP growth areas. Accumulation strategies are being directed towards sectors like IT, Chemicals, and FMCG, being trading below long-term valuations and seeing future triggers like improvements in global and rural demand. 

The author Vinod Nair is the Head of Research, Geojit Financial Services.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 19 May 2024, 05:02 PM IST