US stocks have recorded their worst first half in more than 50 years after a rout triggered by the Federal Reserve’s attempt to curb persistent inflation and exacerbated by gathering concerns over global growth.
The S&P 500 fell 0.9 per cent on Thursday, leaving the blue-chip index down by 20.6 per cent in the first six months of 2022. Wall Street equities have not endured such a punishing start to a year since 1970, when equities sold off in response to a recession that ended what was up to that point the longest period of economic expansion in American history.
The pullback in US stocks has eviscerated more than $9tn in market value since the end of 2021, according to Bloomberg data on the S&P 1500 index, a broader gauge which tracks small, mid and large-cap groups.
“The market mood is dominated by the possibility of recessions in the US and Europe,” said Bastien Drut, strategist at Paris-based asset manager CPR. “It is very negative,” he added, warning that the days of being able to rely on central banks easing monetary policy to support economic growth were “gone”.
The technology-heavy Nasdaq Composite has also tumbled this year, sliding 1.3 per cent on Thursday to take its losses in 2022 to almost 30 per cent.
All sectors of the S&P 500 have dropped during the half-year, with the exception of energy stocks, which are 29 per cent higher. Consumer discretionary stocks have fallen the most, registering a 33 per cent decline. Utility stocks, seen as an inflation hedge because of companies’ stronger ability to pass higher costs to consumers, have given up the least, down 2 per cent this year.
“Everything has been very inflation-driven,” said Paul Leech, co-head of global equities at Barclays. “It has been the theme of the year and it has just intensified, really.”
Across the globe, big stock indices have fallen sharply. Europe’s Stoxx 600 was 1.5 per cent lower on Thursday, leaving it down about 17 per cent this year. MSCI’s index of Asia-Pacific markets has slumped 18 per cent in 2022 in dollar terms.
Top policymakers at the European Central Bank’s annual conference on Wednesday warned that the era of low interest rates and moderate inflation had come to an end following the inflation shock caused by Russia’s invasion of Ukraine and the coronavirus pandemic.
Fed chair Jay Powell has warned that if the central bank does not raise interest rates high enough to combat inflation quickly, the US could face severe and repeated bouts of price rises that policymakers could struggle to rein in. “The process is highly likely to involve some pain, but the worst pain would be from failing to address this high inflation and allowing it to become persistent,” he added.
Markets have been rattled this month by interest rate rises from the Fed and Bank of England, with the former raising the federal funds rate by 0.75 percentage points to a new target range of 1.5 to 1.75 per cent with policymakers signalling another big rate increase next month.
The ECB is also planning a quarter-percentage point rise in July for the first time since 2011.
“Stubborn inflation readings have precipitated an increasingly hawkish Fed response, tilting the policy focus to fight inflation despite potential economic consequences,” said Scott Chronert, US equity strategist at Citigroup. “Investors are deservedly hesitant to buy ahead of ongoing Fed rate hikes and fear of earnings expectation resets.”
Citi also lowered its year-end forecast for the S&P 500 from 4,700 to 4,200 points on Wednesday. While that new target implies a roughly 11 per cent rise from the benchmark’s current level, economists at the bank also placed the odds of a global recession at 50 per cent.
With interest rates rising, more than half of U.S. households could be priced out of starter homes by 2025, according to a new S&P Global report.
Listen to this article
Your browser doesn’t support HTML5 audio
Equity markets have been very erratic in the past few months. The weak market sentiments, driven by a variety of factors, have sent the stock markets on a roller coaster ride.
Equity markets have been very erratic in the past few months. The weak market sentiments, driven by a variety of factors, have sent the stock markets on a roller coaster ride.
The BSE Sensex came close to its all-time high of 61,200 in January 2022. Since then, much like a pendulum, it has been swinging from 52,800 in March 2022 to 60,000 in April 2022 and back to 52,700 in May 2022.
Selling by foreign institutional investors (FIIs) propelled by geopolitical tensions, rising inflation, and interest rates, among other factors, are the key reasons behind the added volatility. This recent sell-off has not spared anyone (with few exceptions like ethanol stocks), including the bluechip growth stocks. Despite their strong fundamentals, a lot of them have corrected in the range of 30-40% from their highs.
Some have even hit their 52-week lows, urging investors to look for bargain bets in this market.
Bluechip stocks are well-established and financially sound companies that could weather turbulent times. They deliver moderate yet consistent returns for their shareholders.
However, the popularity of such blue chips is the very reason they could tumble sharply. And that's exactly what has happened recently.
With that in mind, we pen down a list of 5 bluechip stocks hitting their 52-week lows. Maybe there is a hidden investing opportunity. Maybe not. Let's find out...
First on the list is HDFC Bank.
HDFC Bank's stock price has tumbled down to its 52-week low, touching ₹1,285 earlier this week amid the recent sell-off.
The dominant private sector bank in the country boasts a total asset base of over ₹20 tn and an extensive network of over 6,300 branches.
Its dominance and conservative nature has facilitated a smooth road to profitability. The bank's net profit on a 5-Yr CAGR basis stands at more than 20%., Interestingly, HDFC bank's net NPAs (non-performing assets) have never crossed 0.5% of loans.
The returns have been even more gratifying. The business has generated an average return on equity (ROE) of 17.2% in the past five years.
With proficient management in tow, the company has been rewarding its shareholders with an average dividend yield of 0.4% over the past 5 years, in line with the industry average of 0.5%.
HDFC Bank is all set to be merged with HDFC. The much-anticipated merger has been touted as value accretive.
HDFC will acquire a 41% stake in HDFC Bank, in addition to the 21% stake it already owns. Under the proposed scheme, the shareholders of HDFC will receive a total of 42 shares of the bank for every 25 shares held.
Currently, the company is trading at a Price to Book value (P/BV) of 3.5x, which is a discount to its 10-Yr median P/BV of 4.5x but at a premium to its industry average of 2.2x.
#2 Axis Bank
Next on our list is another private bank - Axis Bank.
The recent sell-off has not spared Axis Bank either. After touching a high of ₹800 in April 2022, the stock tumbled down by 20% to its 52-week low of ₹630.8 earlier this week.
However, this is definitely not due to its performance. The bank has improved its provisions and asset quality sharply over the past few years. With stringent due diligence, the lender's net NPAs have fallen precipitously from 2.1% in 2018 to 1.1% in 2021.
A large private lender in the country, Axis Bank has also been a favourite among retail and institutional borrowers with a well-spread network of over 4,500 branches. The company recently absorbed Citibank's retail portfolio, giving a boost to its business.
On a CAGR basis for five years, Axis Bank has generated a net profit of 11% and an average return on equity (ROE) of 6%.
The company's average dividend yield comes to around 0.3% for the past five years, a little below the industry average of 0.5%.
Axis Bank is currently trading at a P/BV of 1.9x, which is at a discount to its 10-Yr year median P/BV of 2.3x and industry P/BV of 2.2x.
Third on our list is Nestle India.
The country's leading FMCG giant has also fallen prey to this market mayhem, falling 11% from its April 2022 levels to its 52-week low of ₹16,140 touched last week.
A subsidiary of the Swiss-based Nestle, the company's business is spread across the country with 8 manufacturing and processing units.
The company enjoys an established market position in most of the categories it is present.
A pioneer in the culinary segment, it offers a range of products under the brand name Maggi. It enjoys leadership in milk and milk products, beverages, prepared dishes, and cooking aids, chocolate and confectionery.
Nestle's industry dominance and well-established brands have propelled its margin profile culminating in healthy cashflows.
While the revenues and net profits have grown robustly at a 5-Yr CAGR of 9.8% and 16.3% respectively, the returns have been equally strong. The company's 5-Yr average ROE stands at a whopping 72.1%.
With zero debt on its book and healthy cashflows, the company has been rewarding its shareholders consistently. A dividend paymaster, the company's 5-year average dividend yield has been phenomenal, averaging 5.1%, much higher than the industry average of 2.1%.
Nestle is trading at a P/E of 68.1x. The stock is trading at a small premium to its 10-year historical median P/E of 62.1x, but trading at an exorbitant premium to the industry P/E of 35.2x.
#4 Wipro
Fourth on our list, is the information technology (IT) giant, Wipro.
Most largecap IT stocks have fallen in line with the selloff in global tech rout and Wipro has followed suit. Wipro currently trades at ₹493, a tad higher from its 52-week low of ₹462 touched last week.
A global IT player, Wipro has a wide presence across sectors with clients in banking, financial services, healthcare, energy, natural resources, and manufacturing.
The company has managed to propel its margin profile by successfully venturing into new segments and lowering its employee costs.
With a total employee strength of 231,000, the company's attrition ratio has come down from 16% to a respectable 12% (lower than the industry average of 16%) in the past 5 years.
The revenue and profits have grown at a 5-Yr CAGR of 2.4% and 4.2% respectively, while the 5-Yr ROE average stands tall at 18.3%.
Despite piling up cash on its books, the company has not been very generous to its shareholders. The dividend yield has been in the range of 0.4%, much lower than the industry average of 1.9%.
At present, the company is trading at a P/E of 21.1x, a premium to its 10-year historical median P/E of 16.3x but at a discount to the IT industry P/E of 27x.
#5 Tata Steel
Last on the list is India's steel manufacturing behemoth and Asia's first integrated private steel company, Tata Steel. It operates a capacity of 20 million tonnes (MTPA) per annum.
Falling from its April 2022 levels of ₹1,350, the stock has tumbled down to ₹1,188, inching closer to its 52-week low levels.
But the stock performance is not a reflection of the company's business. The company has performed well, largely benefiting from the recent run-up in steel prices.
The company has a strong presence across the entire steel manufacturing value chain, from raw materials (iron ore and coal) to distribution of steel and other value-added products. It's well-poised to grow briskly from the government's spending push on infrastructure.
The company has enjoyed a stellar run over the last 5 years. The revenues and profits have shot up by a 5-Yr CAGR of 11.4% and 70% respectively.
The company's net debt to equity ratio has fallen precipitously from 1.7x to 1x in the past five years and current interest coverage ratio stands at 2.8x.
Rewarding its shareholders well, the company follows a very liberal dividend policy. The dividend yield in the past 5 years has been averaged around 3.4%, a little below the industry average of 5%.
This recent fall in the stock price has the company trading at a P/BV of 1.3x. However, it still trading at a premium to its 10-Yr median P/BV of 1.1x but at a discount to its industry P/BV of 1.6x.
In conclusion...
When it comes to stock selection, valuations play a key role. However, it is not the only metric. There are various other important factors driving your decision-making process.
So before you choose an investment ensure that you dig deeper. Even if they are bluechip stocks.
Bluechip stocks don't come with a guaranteed stamp. Quality also has an expiry date. There are several bluechip stocks that have fallen drastically and never recovered. Satyam Computers, BHEL, Unitech, and the likes...even the world-renowned Lehman Brothers.
Since bluechip stocks are well-recognised, naive investors invest in them taking their valuation a notch higher.
Thus, investors must be very cautious of the price they are willing to pay. If the stock trades at unrealistic valuations, let's say at a PE of 100 or more, you must stay away from it until it's available at a reasonable valuation.
Bear in mind that investing in stocks comes with a inherent risks. Doing thorough research won't eliminate them, but it will surely minimise them. And when it comes to investing in stocks, that is what truly matters.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
{{^adFree}}{{/adFree}}
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.