Expert view: Market ripe for consolidation; these 5 stocks may do well in FY25, says Rahul Ghose of Hedged.in

Rahul Ghose, the CEO of Hedged.in, believes that while the Nifty 50 may continue its positive momentum, it may not yield similar returns as in the last six months. He expects to see a consolidation in the broader indices. Nifty 50 can be in a broader range of 25,000 on the upside by the end of the year. In an interview with Mint, Ghose shares his views on sectors he is positive about and expects five stocks, including Infosys, Reliance Industries and HDFC Bank, to do well in FY25.

Edited excerpts:

How do you assess the Indian stock market's performance in the last six months? Where do you see the Nifty 50 by the end of the year?

The Indian stock market has shown remarkable resilience over the past six months despite global uncertainties, inflationary pressures, and domestic election outcomes that did not align with expectations. 

The Nifty 50 has managed to navigate these challenges, largely supported by robust domestic consumption, favourable corporate earnings, and sustained domestic institutional investment inflows (DIIs). 

Banking and financial services, capital goods, and infrastructure have outperformed the broader markets thanks to the favourable demographics, underlying strong fundamentals and the expectations of reform momentum to continue keeping aside fears that the coalition government formation could hamper the pace of economic growth. 

Looking ahead, I anticipate the Nifty 50 will continue its positive momentum, but in a tepid way. 

It will not be wise to expect a return potential similar to that of the past six months. 

One reason is that the majority of the stocks in the broader indices looked to have been fully valued. 

For example, SBI stock has gone up from ₹500 to ₹900 in six months without any major change in fundamentals. One can see many examples like these. 

It will be a stock pickers market going forward. 

I would expect the pace of the rally to tone down, and one can also see a consolidation happening in the broader indices. 

Nifty 50 can be in a broader range of 25,000 on the upside. 

The risk-reward ratio doesn’t prefer buying now. It suggests us to be more selective.

Related story: Nifty 50 is up 10% in the first half of the year; can it cross 26,000 by December?

Should there be a correction in the market, how should retail investors prepare?

The best way to handle this in the current low VIX environment is to buy long-dated in the money put spreads proportionate to the delta of the stock one holds. 

If majority holdings are small caps it still warrants going ahead with 50 per cent of these long-dated options. 

An example of this is 24,000PE buy December puts with adequate offsets of September and a minimum of 2000 points gap between them.

What is your view on the mid and small-cap segments? Are their gains sustainable?

The mid and small-cap segments have delivered impressive gains recently, driven by improved corporate earnings, economic recovery, and increased investor interest. 

These segments often outperform in a growing economy due to their higher growth potential than large caps. 

However, the sustainability of these gains depends on factors including economic stability, earnings growth, and market liquidity. 

While there is potential for continued growth, these segments are inherently more volatile and can be susceptible to market corrections. 

In the current market phase, investors should take some money off these counters and wait to accumulate them once again when they see the long percentage of the institutions going below 75 per cent and then eventually 50 per cent.

How should one play the mid and small-cap space? What are the areas of opportunity?

Investing in mid and small-caps requires a strategic approach, given their volatility and potential for high returns. Here are a few tips:

Focus on fundamentals: Prioritise companies with strong balance sheets, consistent earnings growth, and competitive advantages. Look for businesses with sustainable business models and robust management teams. Even in these counters, in the current sentiment.

Diversification: Spread investments across various sectors to mitigate risks. For instance, consider opportunities in niche sectors like speciality chemicals, pharmaceuticals, and technology, which have shown strong growth potential.

Long-term horizon: Be prepared to hold these investments long-term to ride out market volatility and capitalise on growth.

Regular monitoring: Closely watch company performance and market trends. Mid and small-cap stocks can be more sensitive to market changes, so regular reviews are essential.

Stocks whose valuations have far exceeded growth expectations should be closely monitored and, if necessary, removed from portfolios. 

The thing about small and mid-cap companies is that when they rally, they rally like there is no tomorrow. But they fall equally faster and, more importantly, harder. 

Entry and exit timings in small and midcaps become critical, and we normally have a combination of technical and fundamental approaches to make such decisions.

Areas of opportunity:

Speciality chemicals: Benefiting from global supply chain shifts and increased domestic demand.

Pharmaceuticals: Driven by innovation, export opportunities, and healthcare reforms.

Technology: Companies involved in digital transformation and IT services. It seems to be finally coming out of its bear market rally, and the correction happened in the large-cap IT stocks that have become attractive and can be closely looked at currently

Renewables: Firms focusing on sustainable energy solutions and green technologies.

Also Read: Airtel, Jio tariff hikes: Is the telecom sector ripe for rerating? Experts weigh in

Which stocks do you think may do well overall in FY25?

Since the broader markets have rallied sharply, it is important to focus on spaces which still offer good value and will be immune to market corrections if and when it happens. Here are a few picks that can be considered

Infosys: As a leader in the IT services industry, Infosys is well-positioned to benefit from the ongoing digital transformation and global demand for IT services. In fact, as mentioned earlier, the entire large-cap IT space looks attractive – TCS, Wipro, Tech Mahindra.

HDFC Bank: With its robust balance sheet and consistent growth in retail banking, HDFC Bank remains a strong performer in the financial sector. The stock has been underperforming in the recent rally, and we feel the merger hangover is now behind it. The stock is set to rally afresh.

Reliance Industries: With diverse business interests, including petrochemicals, retail, and digital services, Reliance Industries offers a balanced growth opportunity.

Dr. Reddy's Laboratories: Strong in innovation and global markets, Dr. Reddy’s is poised to benefit from healthcare trends and export opportunities.

Tata Power: Focused on expanding its renewable energy portfolio, Tata Power is well-aligned with the global shift towards sustainable energy. That said, Tata Power and some of its peers are expensive at these levels, and these stocks should be specifically considered after corrections.

What are your expectations from the Union Budget 2024 from the market's perspective? What sectors could be focused on in the Budget?

The Union Budget 2024 is crucial as it sets the stage for the next phase of economic growth in the next four to five years. 

From a market perspective, we expect the budget to focus on infrastructure development, job creation, and digital transformation. 

Continued emphasis on the 'Make in India' and 'Atmanirbhar Bharat' initiatives will be essential.

Key expectations:

Infrastructure and real estate: Increased allocation for infrastructure projects such as highways, railways, and urban development will stimulate economic activity and create jobs. Real estate could benefit from incentives for affordable housing and reforms in the land acquisition process.

Technology and innovation: Support for the technology sector through initiatives aimed at digital infrastructure, startups, and R&D (research and development) could drive growth and innovation.

Healthcare: Enhanced budgetary allocation for healthcare infrastructure and research can ensure long-term benefits, particularly after the pandemic highlighted the sector's importance.

Renewable energy: Policies promoting renewable energy and sustainability will be crucial for long-term growth and environmental benefits.

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Disclaimer: The views and recommendations above are those of the expert, not Mint. We advise investors to consult certified experts before making any investment decisions.