At a time when foreign institutional investors (FIIs) have emerged as persistent net sellers, offloading $12.7 billion in March alone, one might expect sharp swings in the largest Indian companies. Yet, that has not played out. The large-cap stocks have displayed remarkable resilience, with “normal impact costs and no jumps in trading activity”, noted DSP Mutual Fund.
Data shows that 30 of Nifty 50 stocks have lost 5% or more in the last one month, with the sharpest drawdown seen of 15% in IndusInd Bank. Yet, valuations of these large-cap stocks have quietly drifted towards levels that have historically coincided with periods of deep pessimism, highlighted by the fund house in its April edition of Netra report.
On a percentile basis, the P/E of Nifty Top 10 Equal Weight Index stands at the 17th percentile, a level last observed in 2016 and 2020 — periods marked by heightened pessimism and muted growth expectations for these businesses.
According to DSP MF, the opportunity is visible, but the question is whether the investors can act as sentiment remains fragile.
Historically, investing at such depressed valuations has been rewarding for patient investors. This is not because markets can rebound immediately when these levels are reached, but because these businesses, being market leaders, have seen such cycles and emerged stronger time and again, as highlighted by the fund house.
This is where the debate around timing becomes nuanced. When markets are richly valued, timing matters as even small misjudgments can lead to long periods of subpar returns. But when valuations are compressed and at lower levels of their long-term averages, the margin of error widens, shifting the risk-reward equation.
Data from DSP MF shows that the top 10 largest stocks in India are available at or below their average valuations. At the same time, 80% of these stocks have a return on equity (ROE) at par or above average levels, suggesting that fundamentals are holding up even if the sentiment remains weak.
DSP MF said the real challenge for investors is “behavioural, not analytical”. When the investor narratives are unfavourable, acting on the opportunity becomes difficult, but the fund house said that it is precisely during such phases that disciplined allocation becomes rewarding.
DSP MF also dropped its conservative stance on equities, suggesting a moderate increase in equity allocation amid the current correction.
“It is prudent to start raising equity weights while the market is falling and moving closer to fair value. Each incremental addition of capital buys more units of equity. A preset course of action in such phases is the best way to increase exposure,” it noted.
Disclaimer: This story is for educational purposes only. 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 making any investment decisions.
