As I suggested yesterday (see A perfect storm), “the best strategy under the present circumstances would be to (a) hold nerves and not panic; (b) review the portfolio for any corrective action that may be needed once the storm passes and the sea becomes calmer.”
To add further to that, I may suggest that the following points may be pertinent to note while reviewing the portfolios:
1. The higher cost of capital (interest rates) would result in lower fair valuation for equities in general. The growth companies that have debt on balance sheet or need to borrow for capex; and/or where the free cash flows are mostly back ended may see much sharper cut in their target multiples. In fact we have already seen 20% derating in Nifty PE Ratio over the past eight months.
2. The market consensus was working around 18% CAGR for Nifty earnings over FY23-FY24. The realized earnings growth may be much lower than this. My personal assessment is that we may end up with ~10% CAGR over FY23-FY24.
3. The popular trades of the previous market cycle (2018-2021) may continue to see sharper valuation rationalization over the next couple of years. Many of these stocks may therefore not participate in the next market cycle.
4. Monetary tightening, growth slowdown and consumption demand destruction shall essentially result in deflationary conditions in 2023-24. The strong earnings cycle for most non-food commodities may therefore not last much longer. The metal and energy stocks may therefore see sharper correction in multiples and fair value targets.
5. A new market cycle is mostly led by the market leaders, till a new theme(s) emerges and the stocks from that theme(s) catch the fancy of the market participants. It is therefore always better to be positioned in a large cap basket during the twilights of a market cycle.
In my base case assessment, the risk reward in Nifty from one year perspective is positive at the current levels.
