As the quantitative tightening cycle peaks, the downward effect on equity markets is likely to wane. ICICI Securities expects the equity valuation contraction to slow down if there is a probable pivot towards quantitative easing (QE), except for areas that are still extremely expensive and growth expectations are sub-optimal.
Rising interest rates put equity markets under pressure throughout 2023 with foreign investors, in search of safe-haven bets, on a selling spree since the start of the year.
The banking crisis in the US has resulted in expectations that the Federal Reserve would go slow on rate hikes. Strengthening the theory is recent inflation data, which were largely in line with estimates.
US consumer inflation eased in February but remained elevated as the Fed tries to balance its inflation fight with financial stability concerns.
The brokerage expects stocks with robust earnings growth outlook and reasonable valuations to outperform as P/E valuation contraction halts and stock prices track earnings growth.
“If the Fed pivots towards quantitative easing later in the year, then valuation expansion is likely, which could trigger a bull market,” it said.However, a key risk to this proposition is central banks’ maintaining aggressive quantitative cycle, which results in contagion in global financial markets.
The pivot from the Fed might come at a time when India’s domestic cycles are robust, ICICI Securities said, adding that the domestic capex cycle and credit cycle are still at a nascent stage of recovery coinciding with the decadal bottom of the NPA cycle and PAT-to-GDP at a decadal high of 4.5%.
The brokerage’s top picks from its universe include, SBI, Axis Bank, L&T, Bharti Airtel, Siemens, Coal India, ONGC, Indian Oil, Indraprastha Gas, TCI Express, Indian Hotels, ITC, TVS Motors, among others.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
