Time to Trump up on large cap stocks

Experts tell Hamsini Karthik the stock market correction in recent times increases the risk-reward in favour of large-cap stocks.

A Donald Trump victory and a mere 330 point fall in the S&P BSE Sensex was rather unexpected.

Experts say the stock market correction in recent times, including Wednesday, increases the risk-reward in favour of large-cap stocks.

"Large-caps are at reasonable valuations compared to small- and mid-cap stocks and any steep correction is a good entry point for large-caps," said U R Bhat, managing director, Dalton Capital Advisors (India).

But there are three important words of caution. First, don't be in a hurry to catch the falling knife.

"There may be more buying opportunities that the market will offer in the short term. So investors needn't be in too much of a rush to increase their exposure to stocks," said Deepak Jasani, head of retail research, HDFC Securities.

Don't buy large-caps in one shot; go slow (or buy-on-dips as it is known in the investors circuit), is the next advice coming from Dipen Seth, head of research, Kotak Securities.

"Investors may be better off accumulating stocks in smaller quantities, whenever the markets offer a good opportunity buy stocks," he added.

Lastly, a bottom-up approach may be more rewarding.

"India is not in a stable growth rate mode scenario and stock-specific or a bottom-up approach may yield better results," Pankaj Pandey, head of retail research, ICICI Securities said.

Bottom-up approach is when an investor focuses more on stock or a company, taking into account its valuation and earnings potential, rather than looking into the industry in which the company operates or on the economy as a whole.

Trump's victory is also likely to have implications for India's two large export-oriented sectors that also have a sizeable weight in broader indices: IT and pharmaceuticals.

Among the two, exercising caution on the IT sector may be prudent in the near- to medium-term according to market gurus.

"We need to see if there are any trade barriers imposed, particularly for the information technology sector restricting the immigration process," Seth added.

Even Rashesh Shah, Chairman, Edelweiss Group, feels that export-oriented sectors may not be the great bets due to global volatility.

"We have a clear call on stocks based on India's prospects due to its growth and stability and not due to global growth," he added.

But a few others like Jasani have a different view who believe that the possibility of immigration curbs by the US seems like an electoral rhetoric.

"More use of IT and digitalisation is the reality and US cannot afford to do away with the cheap skilled labour which countries such as India offer. But if the rhetoric is reinforced going ahead, then despite the financials of IT companies looking unaffected, the valuations could correct," he asserts.

While IT stocks may be negatively impacted, healthcare stocks could gain as experts say Trump was seen to have a 'pro-generic' drugs approach on the pharmaceuticals sector and thus pricing related concerns may not resurface for Indian healthcare stocks such as Sun Pharma and Dr Reddy's Laboratories.

The other sectors which find interest are automobiles, engineering companies and banks.

Nevertheless, at this juncture the advice is not to drill down on stocks based on sectors, even in the large-cap space.

"Large-caps appear more attractive after their recent underperformance, but one still needs to slice and dice and do bottom fishing rather than buying across the board," says Jasani.

Among stocks that experts recommend include Asian Paints, Maruti, Tata Motors, IndusInd Bank, HDFC Bank, Glenmark, Lupin, Dr Reddy's and Larsen & Toubro.