Share market in for ‘sharp correction’ soon; Credit Suisse favours cyclicals over defensive stocks

Indian share markets are expected to see a ‘sharp correction’ soon, as profit booking continues in the coming weeks.
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Indian share markets are expected to see a ‘sharp correction’ soon, as profit booking continues in the coming weeks, Credit Suisse said. “We believe the equity market could see some further profit booking in coming weeks, but we expect this correction to be very sharp and to not last long,” Jitendra Gohil, Head of India Equity Research, and Premal Kamdar, Equity Research Analyst, Credit Suisse, said in a note. Sensex has turned negative year to date, falling 9% from mid-February highs.

The global investment manager is, however, not advising investors to turn away from domestic markets. Instead, Credit Suisse said that it recommends investors to use this correction as a buying opportunity from a 6-to-9-month perspective. “While our global Investment Committee (IC) acknowledges near-term challenges in equities, it maintains a positive outlook on equities from a medium-term perspective, given the overall favourable growth prospects and ultra-loose monetary policies,” they added.

Banking on growth to rebound sharply in the second half of the fiscal year, analysts at Credit Suisse prefer cyclicals over defensives and mid-caps over large-caps. “We continue to prefer large banks, industrials and export-sensitive sectors like metals and chemicals. We also continue to prefer mid-caps given our expectation of a broad-based recovery in the second half of this fiscal year,” the note said.

In the bond market, Credit Suisse said that the Reserve Bank of India’s quantitative easing is likely to keep government bond yields range-bound despite higher-than-expected supply and elevated inflation. This has led them to prefer corporate bonds over treasuries, with a preference for 1 to 3-year duration bonds.

India is grappling with the second wave of the coronavirus pandemic and the continuous spike in daily case count has led some states to announce restrictions on economic activity. While the restrictions could impact growth, Credit Suisse believes India Inc is better positioned to tackle the challenges this time.

Currently, the consensus growth projections for India forecast for India stands between 10.5% to 12.5% for the fiscal year. However, the spike in cases, going from 10,00 in February to 3 lakh in April has led to lockdowns that may impact projections. However, there is still hope for India. “Even if we assume a cut of about 100–150 bp to India’s GDP, India can still deliver low double-digit real-GDP growth in FY 2022, the fastest growth in the world,” the note added.