Even though benchmark indices have been recovering in March after five months of losses, Standard Chartered expects market volatility to remain elevated in the near term as investors adjust to an uncertain environment.
However, the brokerage believes the risk-reward for domestic equities has improved over a 12-month horizon, driven by reasonable valuations, a likely improvement in the growth and earnings cycle, and easing financial conditions. It remains overweight on equities and recommends using market dips as buying opportunities.
Preference for Large-Caps with Select Small-Cap Opportunities
Standard Chartered is overweight on large-cap equities, citing their stronger balance sheets, more attractive valuations, and higher earnings visibility, which offer a greater margin of safety during periods of volatility. The brokerage also sees tactical opportunities in small-cap equities due to their broader industry exposure and lower risk of earnings downgrades. Historically, small-cap stocks have outperformed during periods of easing liquidity and improving economic growth.
Bonds Favoured Over Cash Amid Softening Inflation
The brokerage expects bonds to outperform cash, supported by softening inflation, monetary policy rate cuts, and active liquidity management by the Reserve Bank of India (RBI). Standard Chartered is overweight on medium- and long-maturity bonds, as well as high-quality corporate bonds, due to their attractive absolute yields. Additionally, positive supply-demand dynamics and robust foreign inflows from index-tracking funds are expected to be tailwinds for the bond market.
Gold Remains a Key Portfolio Hedge
Standard Chartered continues to see gold as an important diversifier and portfolio hedge against market uncertainty. The precious metal’s defensive nature makes it a preferred asset in periods of elevated volatility.
Factors Driving Positive Equity View
The brokerage highlights several factors supporting its positive outlook on domestic equities.
Improving Growth and Earnings Cycle: Standard Chartered noted that India’s GDP grew 6.2 per cent year-on-year in Q3FY25, rebounding from the cyclical low of 5.6 per cent in Q2FY25. Nifty index earnings grew by approximately 7 per cent year-on-year in Q3FY25, an improvement from around 4 per cent growth in H1FY25. Consensus estimates for FY2025-27 project robust GDP growth of 6.5 per cent and corporate earnings growth of 13 per cent.
Attractive Valuations: The Nifty's 12-month forward price-to-earnings (P/E) ratio has eased to around 18.3x, close to its 10-year average of 18.2x, and significantly below the peak valuation of 23x. Furthermore, the MSCI India P/E premium over MSCI Asia-ex-Japan has moderated to 54 pe rcent, down from the September 2024 peak of 96 per cent, making valuations more reasonable.
Easing Financial Conditions: Standard Chartered highlighted that the RBI's recent policy repo rate cut, the first in five years, reflects easing inflationary pressures and slowing economic growth. Additionally, the central bank’s liquidity measures—including FX buy-sell swaps, open market operations (OMOs), and variable rate repos—are adding liquidity to the system. The brokerage expects bond yields to decline further and anticipates another 25-50 basis point repo rate cut by the RBI in FY2026.
Signs of Market Bottoming: Standard Chartered pointed out that the Nifty index is trading below key support levels (50, 100, and 200-day moving averages), with over 80 per cent of its constituents below their 200-day moving averages. Historically, market sell-offs have bottomed out when approximately 84 per cent of the index constituents fall below their 200-day moving averages.
Sector Preferences: Financials and Consumer Discretionary in Focus
Standard Chartered maintains a preference for domestic cyclicals, given its expectation of a cyclical growth recovery and a favourable earnings outlook. The brokerage is overweight on financials, expecting the sector to benefit from easing financial conditions and stable asset quality. It also upgraded consumer discretionary stocks to overweight, anticipating improved consumer spending and earnings growth.
To balance the portfolio, the brokerage has maintained an overweight stance on information technology (IT) stocks as a defensive play. However, it downgraded industrials to neutral, reflecting concerns over potential growth moderation in the sector.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.