Stay away from stock market for the time being

Despite the Reserve Bank of India announcing steps to increase credit flow and provide liquidity, many stocks of non-banking financial companies (NBFCs) and housing finance companies slipped badly on the stock market for the week gone by. NBFCs have borne the brunt of the market selloff post the IL&FS default and muted sentiment. Rising interest costs, worries over loan growth and worsening credit risk have been a huge overhang on these companies and stocks are seeing immense selling pressure on the bourses. Investors have to be very watchful as even though steep corrections have brought valuations lower, headwinds such as rising crude oil prices, rupee volatility, weak consumer demand and rising interest rates can bring the Sensex further down. We expect equity multiples to get re-rated in the election year due to higher raw material prices, shrinking operating margins and slow revenue growth by many Indian companies. If we look at the current Sensex levels, then the one year forward price to earnings ratio for the Sensex is 18.95 times, while it is 20.50 for the BSE Mid Cap Index. An interesting theory in the market is that if the valuations of the above two were to converge at some point of time soon, then the BSE MidCap index should see further downside. We expect stock market to be under tremendous pressure in the next few weeks. As per data available, foreign investors have pulled out a massive Rs 19,000-odd crore from the domestic market in the first two weeks of this month, while the Indian mutual fund houses have bought stocks worth around Rs 11,000 crore in the same period. Foreign investors have been trimming their Indian equity portfolio during the last few months, with a view that as comparable to other countries, India does not favour well in their risk reward category of investment at this point of time. During the week, the Sensex lost 1.20% to close at 34,315, while the Nifty declined 1.64% to close at 10,303 levels. There is no stock recommendation during this week, as we feel that investors should stay away from the stock market for the time being and stay invested as per their current asset allocation model and risk profile.

Rajiv Kapoor is a share broker, certified mutual fund expert and MDRT insurance agent.