Nifty Correction Over? Alchemy Capital’s Alok Agarwal Sees Metals, PSU Banks Leading Rally
The Nifty Smallcap 250 Index has faced challenges since September 2024, undergoing a harsh 1.5-year consolidation period. This saw the Nifty 500 decline by 15%, significantly impacting market breadth. However, Alok Agarwal, Head – Quant & Fund Manager at Alchemy Capital Management, suggests the bulk of this correction may be behind us. He cites compressed valuations, policy support, and an improving earnings landscape, spotlighting sectors like metals, capital markets, PSU banks, and regional private banks as potential forerunners in the upcoming rally.
Current Equity Market Dynamics
– Consolidation Phase: The Indian equity market has endured a 1.5-year consolidation since late 2024, with the Nifty 500 correcting 15% from its September peak. This was driven by sluggish earnings and global uncertainties, including potential U.S. tariffs.
– Market Weakness: During this correction, over one-third of all stocks experienced declines exceeding 25%. Indicators show that India is facing genuine economic deceleration, with GST collections stagnating in single digits for eight consecutive months. Similarly, nominal GDP and Nifty 50 earnings have remained stagnant in single digits for seven quarters.
The data reflects not just fleeting issues but a true cyclical slowdown that has unsettled investor sentiment.
Government and RBI Interventions
Both the government and the RBI have reacted with unprecedented measures:
– Fiscal Stimulus: Direct tax cuts and targeted GST reductions are aimed at boosting consumer spending, alongside strict fiscal discipline to maintain macroeconomic stability.
– Monetary Policy: The RBI has reduced policy rates to record lows and lowered the Cash Reserve Ratio (CRR), injecting liquidity into the system while keeping inflation in check.
This joint effort fosters robust conditions for recovery, with effects expected to materialize in upcoming quarters.
Valuation Reset and Growth Drivers
– Valuation Divergence: Indian equities have significantly underperformed relative to emerging markets and global indices, diverging by over 2,000 basis points in the last 12-15 months. This correction has reduced the valuation excess from the previous bull run, enhancing the risk-reward scenario for investors.
– Structural Growth: Fundamental growth drivers in India—favorable demographics, persistent urbanization, and increasing digital penetration—remain intact. While challenges exist, these factors suggest the end of major price corrections.
Sectors to Watch
As the market digests the growth slowdown, certain sectors exhibit promising earnings momentum:
– Metals: Precious and non-ferrous metals are poised to benefit from de-dollarization and rising demand driven by AI and infrastructure projects.
– Capital Markets: Sectors related to brokering and asset management are seeing increased retail investor participation, with mutual fund Systematic Investment Plans (SIPs) reaching new highs.
– PSU and Regional Private Banks: With significant improvements in asset quality, PSU banks are emerging as turnaround stories. Regional private banks are capturing market share in underbanked areas, maintaining competitive net interest margins.
Precious Metals and Investment Strategies
Agarwal emphasizes the ongoing relevance of gold in an increasingly leveraged world, noting that central banks have begun accumulating gold at unprecedented rates. This growing interest points to a shift away from U.S. Treasuries, suggesting a robust long-term outlook for both gold and silver amid rising industrial demand.
Regarding asset allocation, the focus is on:
– Equities vs. Diversification: Despite potential equity opportunities, a diversified approach that includes precious metals may offer a buffer against volatility and geopolitical risks. Investors should engage with qualified advisors to tailor strategies based on their individual circumstances.
Smallcap Outlook
The Nifty Smallcap 250 Index has been underperforming, yet the correction has purged valuation excesses. For sustained participation in FY27, a broader macro recovery is essential. Smallcaps typically display higher responsiveness to earnings growth, which, when it returns, could lead to rapid valuation reratings.
Conclusion
In summary, while the Nifty correction appears largely behind us, outlooks remain mixed. Stock selection is crucial as sectors like metals and PSU banks may lead the charge in future rallies. Investors should stay informed and consider a balanced approach for potential rewards in this evolving market landscape.