Correction likely after a sharp run; buy on dips: Credit Suisse Wealth Mgmt

The recent 'hope rally' in Indian markets was mostly led by a presumption that global central banks, especially the US Fed, may go slow on rate hikes in the rest of 2022 as the inflation cools off.

After a near 15 per cent run in the S&P BSE Sensex and the Nifty50 from July 2022 till date, analysts are turning cautious on the equity markets with those at Credit Suisse Wealth Management expecting a near-term correction.

"A sharp rebound in India equities pushed its valuation premium to near all-time-high levels. The MSCI India index is trading at a valuation premium of 37 per cent and 96 per cent versus the MSCI World and MSCI EM, respectively. India’s 12 month forward PE has expanded to 19.5x, and is currently trading at one standard deviation (STD) above the 10-year mean. As the US bond yields have started to rise, and recessions risks are rising too, some correction in the Indian equity market cannot be ruled out," wrote Jitendra Gohil, head of India equity Research at Credit Suisse Wealth Management in a coauthored note with and Premal Kamdar.

That said, Gohil and Kamdar suggest a sharp correction, if any, could be a good buying opportunity for long-term investors given India’s superior fundamentals and better growth potential compared to peers.

"We continue to maintain our mild overweight positions in mid-cap companies in a portfolio context. In the near term, we prefer banks and pharma, as well as sectors that could benefit from higher consumer spending ahead of the festive season," they wrote.

The recent 'hope rally' in the Indian equity markets was mostly led by a presumption that the global central banks, especially the US Federal Reserve (US Fed), may go slow on rate hikes in the remaining part of calendar year 2022 as the inflation cools off. After remaining net sellers of Indian stocks, foreign investors returned to Indian shores and bought stocks worth over Rs 40,000 crore between July and August.

In the last one month alone, the Nifty50 has surged 8.7 per cent and outperformed both the MSCI World index (+6.1 per cent) and MSCI Asia-ex Japan index (+0.7 per cent) during this period, data show.

Those at Antique Stock Broking, too, expect the market to remain sideways for some time as valuations are above long-term averages. That apart, global growth slows-down along with increased recession risk in US & Germany, tightening of monetary and financial conditions - both domestic and global and a possible disruption to energy supply are some of the factors that can keep the overall sentiment in check, they said.

"Overall, corporate earnings were sharply ahead of our expectation with upbeat management commentary in terms of demand. Our March 2023 Nifty target stands at 18,000," wrote Pankaj Chhaochharia, India equity strategist and economist at Antique Stock Broking in a recent note.