'We suggest an equity strategy of 5% to 10% exposure to cash, 5% to Gold ETF, close to 50% to Sensex/Nifty/large mid-cap stocks.'
Rising oil prices that can stoke inflation fears, firm bond yields and a patchy monsoon back home can trigger a market correction in the short-to-medium term, feel analysts, who suggest investors will be better off sticking to large-caps stocks.
'India's strong outperformance meets some resistance in the form of rising crude prices, firming US bond yields and risk of inflation. Mid-cap rallies also warrant some caution and leave large-caps relatively more appealing and candidates for re-rating,' wrote Herald van der Linde, head of equity strategy for Asia Pacific at HSBC in a recent co-authored note with Amit Sachdeva and Anurag Dayal.
India, according to HSBC, has been nearly the best performing market in the region for three years in a row, and its valuation premium to the region (Asia ex-Japan) is now 63 per cent versus a cycle average of 53 per cent.
Indian markets, meanwhile, have outperformed in the last three months (FTSE India: +7 per cent, FTSE AxJ: -3.2 per cent) backed by fairly stable earnings (17.8 per cent y-o-y for FY24) expectations, and a robust domestic macro environment (5.8 per cent FY24e GDP growth), HSBC said.
However, inflation (6.8 per cent for August) has moved above Reserve Bank of India's comfort level and external factors turned challenging, which warrants some caution.
In the first six months of FY24, for instance, while the S&P BSE Sensex has notched up gains of 11.5 per cent, mid and smallcap indices on the BSE have rallied over 34 per cent and 39 per cent, respectively, according to data.
The run-up in the markets in these last few months, analysts at HSBC said, has made investors nervous about the markets amid multiple headwinds, especially the mid-and small-cap segments.
Though they expect the market correction, if any, to be sharp and short-lived, they do expect the markets to remain choppy in the near-term.
"Our long range cycle analysis suggests that we are still mid-way into a bull run; in general, a momentum once set does not go away that easily unless broken by a major global crisis or large swings in crude and inflation.
'However, given some uncertainty around where crude will settle in the near term and how US bond yields fare, we can doubtless experience bouts of risk-on and risk-off,' Linde added.
Firm oil prices that could breach $100 a barrel mark soon as winter tightens its grip across Europe now, raising demand for oil and gas, higher consumer inflation, bubble in valuation of small and mid-cap stocks and continued shifting of financial resources from the secondary markets, points out G Chokkalingam, founder and head of research at Equinomics Research, could impact the domestic market sentiment in the short-term.
While the Sensex/Nifty could correct around 3 to 5 per cent amid risk-off trade, Chokkalingam expects mid-and small-caps to come under heavy selling pressure in case bears tighten their grip on the markets.
"Sensex/NIFTY stocks may not fall badly as they didn't participate in tandem with the small-and mid-cap rally, and also due to the fact that the domestic institutional investors might provide significant support to Sensex/NIFTY stocks in the event of any major correction," says Chokkalingam.
"We suggest an equity strategy of 5 per cent to 10 per cent exposure to cash, 5 per cent to Gold ETF, close to 50 per cent to Sensex/Nifty/large mid-cap stocks," Chokkalingam explains.
Those at HSBC, too, favour large-caps over mid-caps on average, and are bullish on banks, pharma, and retail sectors.
'We also like industrials, autos, real estate, and telecom; selective on fast moving consumer goods; utilities, chemicals, and metals,' they wrote.
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Feature Presentation: Ashish Narsale/Rediff.com
