A Kotak Institutional Equities report views the current market correction, spurred by geopolitical conflict, as a prime opportunity for investors to rebalance portfolios by adding quality stocks and exiting overvalued ‘narrative’ stocks.
Amid the ongoing correction in the domestic stock markets, investors have an opportunity to rebalance their portfolios by adding quality stocks and exiting overvalued ones, according to a report by Kotak Institutional Equities.
An Opportunity for Portfolio Optimization
The report said that the recent correction in stock prices, triggered by the ongoing conflict between Iran and the US-Israel, has led to dislocations across segments of the market, creating opportunities for investors. “We see the recent correction in the market and stock prices due to the ongoing conflict between Iran and Israel-US and resultant dislocations in stock prices as an opportunity to (1) add ‘better’ stocks, (2) remove ‘narrative’ stocks and (3) reduce positions in expensive cement and consumer stocks. A churn in portfolios may be the best option, given the circumstances,” the report stated.
Conflict Outlook and Market Assumptions
According to the report, the duration and extent of the ongoing conflict remain highly uncertain, given the different objectives and ‘pain’ thresholds of the stakeholders involved, along with the unpredictable nature of geopolitical conflicts. For now, the report assumes a base case scenario of a few weeks of high-intensity conflict, followed by several months of heightened tensions. It also expects normalization of trade in oil and gas through the Strait of Hormuz over the next few weeks.
Investment Strategy Amid Correction
The report noted that the sharp and uneven correction across market capitalizations, sectors and companies does not imply a permanent decline in corporate earnings, and such assumptions are not valid. It added that the current market environment provides a suitable opportunity for investors to review their portfolios and make necessary adjustments.
The report recommended reducing exposure to sectors such as cement and consumer staples, as well as so-called ‘narrative’ stocks that are trading at high or unjustified valuations. At the same time, the report suggested increasing exposure to financials and other sectors that have witnessed sharp declines due to what it described as unjustified concerns.
The report emphasized that the current correction should be viewed as a chance for portfolio optimization rather than a cause for concern, as underlying earnings prospects of companies remain intact despite the volatility driven by geopolitical developments.
(ANI)
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