After a massive rally over the past two years, India's stock markets have been under pressure over the past month, on the back of massive selling by foreign institutional investors. Disappointing corporate earnings in several pockets, especially consumer goods, where companies have warned of urban demand slowdown, have also added into the negative sentiments among investors.
From its recent high of 85,978.25 touched on September 27, the BSE Sensex has declined over 8 per cent. The NSE Nifty50 has slipped 9 per cent from its life high of 26,277.35.
The decline comes as foreign portfolio investors sold over Rs 94,000 worth of Indian stocks in October and a further Rs 23,900 thus far in November. Signs of a slowdown in demand in areas like passenger vehicles and fast-moving consumer goods have raised concerns about whether a sharp economic slowdown looms. Many companies missing their earnings estimates in the September quarter have added to those worries.
Ace investor Saurabh Mukherjea, the founder and chief investment officer of Marcellus Investment Managers pointed to several reasons behind the slowdown being seen, especially in consumption. One, he feels revenge spending seen post-COVID-19 pandemic has ebbed. While the elite class is thriving, the middle class has been hit hard, he noted. There is a risk that automation and AI (artificial intelligence) could squeeze mid-level jobs further over time unless AI is harnessed constructively and can complement jobs.
"We are seeing a middle-class consumption slowdown, elite items are rocking," he noted.
However, he is not too surprised by the sudden slowdown. He pointed out that after three years of strong economic growth, a cyclical downturn was expected. He doesn't see this as a massive economic crisis but still feels that the corporate earnings slowdown will perhaps worsen over the next few quarters before it gets better.
"This is a classical cyclical downturn. You had three years of strong economy, you are going to get a few quarters of softness. That's the way the whole world works. Two steps forward, one step back," said Mukherjea.
One good thing he sees is there are signs of private sector capital expenditures picking up, as was visible from earnings growth by private sector capex-oriented companies. As private investment picks up, it will create more jobs, in turn driving up consumption. However, that will play out over a few quarters and not instantly.
"It will take time for the private sector capex cycle, which has started, to create jobs. And therefore, we are looking at a few quarters of soft consumption," said Mukherjea.
So, how do navigate the equity markets in these uncertain times?
"This is a time to be circumspect, but this is not a time to be fearful," he stressed.
Mukherjea noted that the Nifty at 23 times its forward price-to-earnings ratio was still well above its long-term average of around 17-18 times. Marcellus is currently fully invested in its large-cap portfolios but is holding on to some cash in midcaps.
"Our view to our client base, whether it's foreign clients or domestic family offices, is to hold your horses a little bit, especially in midcaps. Wait a little bit, we can see the opportunities coming. The country is a fundamentally healthy, buoyant economy," he said.
Marcellus remains positive on the equity markets in the long-term; there are a lot of businesses they want to buy, but would like the valuations to come down a bit, said Mukherjea. For instance, consumer stocks could get cheaper over the next few quarters, with consumption expected to remain soft.
This is a time to rebalance the portfolios, he says.
"Deploy incremental money outside of equities and there will be a time. If this correction sustains, your equity allocation will go down and that will be a time to buy," said Mukherjea.
One advise he has is that investors allocate some money to US equities now, especially to US midcaps. According to Mukherjea, US midcaps are attractively valued and earnings growth was healthy. The US midcap stocks could also rally should US President Donald Trump take measures to boost manufacturing there.