Stock market valuations bounce back: Should you stay put or buy more? Keep an eye on foreign inflows

With stock markets turning positive year-to-date, the argument of cheap valuations is now out the window. However, does it make sense to stay invested in stocks while global markets seem buoyant and domestic firms report strong quarterly numbers? “With the recent rally, valuations have become expensive from a fundamental viewpoint,” Narayan Shroff, Head of Investments – India, Barclays Private Bank, told Financial Express Online. “However, in a world where policy support, especially of the monetary kind, is likely to stay put for several years, we see merit in buying stocks at higher price for the same set of future equity cash flows than before,” Narayan Shroff said.

Banking space is witnessing a healthy recovery with collection averages just shy of the pre-coronavirus levels and provisions strong enough to dodge near-term slippages. The IT sector has already been strong along with pharmaceuticals, while auto sales give a good enough reason to cheer vehicle manufacturers. Narayan Shroff advises that investors should average-in and diversify, with a preference to alpha over beta. “We continue to barbell US and emerging markets with a bias towards quality. ‘Cheap value’ will probably do well in a recovery scenario but difficult to time and unlikely to be long-lasting,” he added.

More Foreign Inflows on the cards?

India has been improving on the coronavirus front while western countries struggle with the second wave. Re-opening of the economy has lifted spirits and macroeconomic data has been positive. India has been outperforming emerging markets and has been a net recipient of foreign flows, Narayan Shroff adds that this trend might continue. Seconding his view, Aashish Somaiyaa, CEO – White Oak Capital said, “My sense is that a rotation is around the corner and India and select emerging markets basis individual fundamentals are likely to witness huge flows in coming times.”

Sectors to watch out for

Analysts at Edelweiss, in a recent report discussing the impact of the US Elections on India, said that they would hold onto their portfolio bias: global reflation, IT, and pharma. “If Biden wins, expect Big Tech to face greater regulatory/tax oversight — a possible hiccup for Indian IT, but just that, pharma to benefit from greater government spends — a boon, but could come with higher pricing concessions for Indian companies, trade to wallow in more predictable policies — but a sharp easing of trade tensions could weigh on Indian beneficiaries (chemicals, manufacturing), and agri/commodities to face uncertainties,” Edelweiss said.

Within Indian equities, Narayan Shroff said that Barclays Private bank continues to prefer “quality”, sustainable businesses with earnings growth momentum, financials including well capitalised banks and non-banks, consumer facing businesses, IT, Pharma and cement as they seem to be well placed to capture future growth potential from this economic rebound.