For the bulls and bears, the current month is expected to be like a game of cat and mouse. It's going to be far more uncertain and unpredictable; unlike the last two months, where the trend was quite clear. i.e. March was a month with a downward trend while April was a month of recovery.
A lackluster earnings season and cautious management commentaries have confirmed the trend reversal from the highs of April. However, it is worth remembering that extreme bear markets like these often sow the seeds for the future alpha-generating ideas.
Intraday, the market stumbled in the last hour after being resilient for most of the day. Sensex lost 0.83% to close at 31,453.51 while Nifty lost 0.95% to close at 9,205.60. M&M (up 3.11%), Power Grid (up 2.89%) and (up 2.48%) were the major gainers while SBI (down 4.72%), Bajaj Finance (down 3.72%) and Britannia (down 3.69%) were the major losers for the day.
Dirt-cheap valuations on Mid-Caps?
In the current market, mid-cap stocks continue to significantly underperform the headline indices. Notably, over the last 5 years, mid-caps have underperformed Nifty by 15% and in last 12 months, mid-caps were down 23% as against the Nifty’s decline of 16%.
As a result, Nifty Mid-caps offers a much attractive value proposition when compared to large caps. Nifty Mid-cap 100 price to earnings ratio is currently trading at 14.4 which is a 25% discount to Nifty.
Market cap-to-GDP ratio has also declined from 79% as on FY19 to 54% currently. It is trading below its long-term average of 75%. The Nifty is also trading at 12-month forward RoE of 11.6%, below its long-term average of 14.1%.
What about Nifty Stocks?
Under the current churn, even some of the marquee names have been battered; especially the ones from the auto and the banking industry.
To state a few examples (Discounts to 10- year average PE)
Mahindra & Mahindra - 40%;
Eicher Motors - 17%.
Axis Bank - 56%,
IndusInd Bank - 67%.
State Bank of India – 46%
ITC - 46% discount
Market remains gripped by the bears and the volatility is only going to increase. However, a quick ratio analysis underlines significant undervalue that market is currently trading at.
Any further correction should provide a great entry point for a long-term investor and should be latched up as a buying opportunity.
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