Nifty, Sensex extend losses; limited upside seen as valuations remain elevated: Analysts

Bears dominated Dalal Street on January 18 as benchmark indices Sensex and Nifty fell for the third straight session, dragged by banking, energy and IT stocks.

The Sensex closed 314 points or 0.44 percent at 71,187, and the Nifty fell 92.80 points or 0.43 percent at 21,479. About 1,483 shares advanced, 1,734 shares declined, and 71 shares unchanged.

Broader markets fell ended flat with BSE Midcap ending marginally in red and BSE Smallcap index ending slightly higher. A majority of sectoral indices were trading in the red. The losses were being capped by gains seen in pharma, PSU Bank, and Auto counters.

According to ICICI Securities, structurally, the Nifty index is undergoing a breather after a 16 percent rally seen over the past two months. However, the formation of higher peak and trough on the larger degree chart signifies robust price structure, they said. “Thus, focus should be on accumulating quality stocks in a staggered manner amid ongoing earning season,” the brokerage added in a note.

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Limited upside seen on elevated valuations

India looks solid on most parameters including strong domestic and FPI flowsflows, earnings growth and macro-outlook, according to Kunal Vora, Head – of India Equity Research BNP Paribas. In terms of underlying fundamentals, India has seen double-digit earnings growth with minimal consensus downgrades. However, valuations are now elevated across metrics,” he noted.

“While most factors remain favourable for Indian equities in 2024, valuation comfort has reduced, and we see limited upside,” said Vora. BNP Paribas prefers private banks, IT services, telecom; and is underweight on staples, autom and pharma. “We prefer private banks, given their strong fundamentals and reasonable valuations. We expect IT services growth to recover and telcos to raise tariffs,” it said.

The brokerage recommended investors to avoid staples and pharma for growth challenges. “We expect autos to consolidate after a strong 2023. We expect high single-digit returns from Nifty 50 in 2024 and prefer large caps,” it added.

Sectors, stocks to watch

With rising bond yields in the US, FPIs may sell again. But this is likely to be countered by DII buying in fairly valued large caps with growth potential, said VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

“Investors may wait and watch for this turbulence to subside. The resilience in IT stocks in this crash is an indication of the strength of the sector. Apart from IT, large caps like RIL, ICICI Bank, L&T and Bharti Airtel have the strength to tide over this turbulence,” he added.

PSU stocks in spotlight

PSU stocks have been in focus as they showed resilience over the last few sessions. “The Nifty PSE sector has been exhibiting a consistent and positive trend, marked by a higher high and higher low formation on its weekly charts over the past 12 weeks. The sector’s current trading level is reflecting a robust and upward trajectory,” said Deven Mehata, Equity Research Analyst, Choice Broking.

Reinforcing this bullish outlook, the index is currently positioned above key moving averages, including the short-term (20 Day), medium-term (50 Day), and long-term (200 Day) Exponential Moving Averages (EMA), Mehata noted.

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Nifty PSE index has established a formidable support base around 7,920 levels, closely aligned with its 20-day EMA. This level serves as a crucial line of defence, providing a safety net against potential downturns, said Mehata.

Conversely, the index faces a resistance barrier near 8,260 levels, and a successful breach of this level could propel the PSE sector to higher ground, potentially reaching 8,600 levels, he added.

“Investors with holdings in PSE stocks are advised to exercise vigilant risk management by trailing their stop losses, ensuring protection against adverse market movements.” Mehata told Moneycontrol.

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