Large-Cap Stocks Reach Valuations Where Timing May No Longer Be a Factor

Large-Cap Stocks Display Resilience Amid Foreign Investor Exit

Foreign institutional investors (FIIs) have emerged as persistent net sellers, offloading a staggering $12.7 billion in March alone. However, this significant outflow has not translated to sharp swings in the largest Indian companies. According to DSP Mutual Fund, large-cap stocks have displayed remarkable resilience, with "normal impact costs and no jumps in trading activity."

Data shows that 30 of Nifty 50 stocks have lost 5% or more in the last one month, with the sharpest drawdown seen of 15% in IndusInd Bank. Yet, valuations of these large-cap stocks have quietly drifted towards levels that have historically coincided with periods of deep pessimism. DSP Mutual Fund highlighted this trend in its April edition of Netra report, noting that valuations have reached levels last observed in 2016 and 2020.

On a percentile basis, the P/E of Nifty Top 10 Equal Weight Index stands at the 17th percentile, a level last observed in 2016 and 2020. These periods were marked by heightened pessimism and muted growth expectations for these businesses. According to DSP Mutual Fund, the opportunity is visible, but the question is whether investors can act as sentiment remains fragile.

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Historically, investing at such depressed valuations has been rewarding for patient investors. This is not because markets can rebound immediately when these levels are reached, but because these businesses, being market leaders, have seen such cycles and emerged stronger time and again. DSP Mutual Fund noted that this is where the debate around timing becomes nuanced.

When markets are richly valued, timing matters as even small misjudgments can lead to long periods of subpar returns. However, when valuations are compressed and at lower levels of their long-term averages, the margin of error widens, shifting the risk-reward equation.

Data from DSP Mutual Fund shows that the top 10 largest stocks in India are available at or below their average valuations. At the same time, 80% of these stocks have a return on equity (ROE) at par or above average levels, suggesting that fundamentals are holding up even if the sentiment remains weak.

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DSP Mutual Fund said the real challenge for investors is "behavioural, not analytical." When investor narratives are unfavourable, acting on the opportunity becomes difficult, but the fund house said that it is precisely during such phases that disciplined allocation becomes rewarding.

In response to the current correction, DSP Mutual Fund has dropped its conservative stance on equities, suggesting a moderate increase in equity allocation. "It is prudent to start raising equity weights while the market is falling and moving closer to fair value," the fund house noted. "Each incremental addition of capital buys more units of equity. A preset course of action in such phases is the best way to increase exposure."