More often in any market, small investors are often the last to get out of the market when a peak is formed, and last to enter when a bottom is made. In the recent correction, some of the savvier investors made some quick purchases at lower levels.
But investors wondering whether the recent rally in the stock market is another lost opportunity may not wring the palms in anxiety just yet. Sure enough, while the Indian markets have rebounded smartly gaining over 21% since their recent lows of 7500 levels on the Nifty 50, stock markets are still not out of the woods.
Of course, while the volatility is reducing in the market that means flash crashes like the one a few weeks ago may not happen again. The market is also beginning to see that the coronavirus has already wreaked the havoc it has done. Companies are likely to remain shut down for long, and some investors may be looking at FY22 for an earnings pick up.
Sure, earnings drivers this year may be missing, thanks to the escalating number of coronavirus cases globally. Indian companies will be at pains to report earnings, which many brokerage houses have already started to factor in. In fact, recently Kotak Securities estimated that earnings growth for FY21 will not be material and one would rather look at the earnings for FY22 instead.
PRESSURE MAY BUILD UP
Companies will be under pressure in the first half of FY21 as labour shortages will mean a slow ramp-up to full capacity. Secondly, demand for discretionary products may just continue to remain weak which means companies earnings will be low.
“We would focus on FY2022E earnings and valuations given that (1) FY2021E GDP and earnings outlook is quite fluid currently and (2) FY2022E earnings estimates will be relatively unaffected by the sharp contraction in the Indian economy in 1HFY21,” said Kotak Securities in a recent report.
At the current levels, stock markets are looking relatively undervalued from a historical perspective. On a trailing earnings basis, the Nifty 50’s price-earnings multiple works out to about 17.5 times FY20 earnings.
Besides, markets have dipped significantly since their highs in mid-February. In fact, even at the current levels, stock markets have corrected about 26%.
FEW POCKETS OF OPPORTUNITY
As far as the markets go, investors may just about see pockets of opportunity particularly in some of the beaten-down sectors. Further, corrections cannot be ruled out because of the escalation in coronavirus cases in the globe, particularly in the US.
Still, investors may do well to watch the foreign portfolio investors in the coming weeks. They have started to nibble into the stock market which may be marking a turnaround in stocks signalling that recent bottoms of 7500 levels on the Nifty may be an intermediate bottom. In fact, in this market discretion is better than valour.
Taking smaller strategic stakes may be better than going all out just because the Nifty 50’s trailing earnings have come down below historical averages at about 18 times earnings.
