Brokerages rarely tell you not to buy stocks, and very few would tell you to sell a stock when it’s due. On Dalal Street, there is a gulf between ‘buy’ and ‘sell’, and brokerages often fill this gap with a lot of new terminologies such as ‘accumulate’ and ‘hold’. Even when a stock is due for sale because of something drastically going wrong in the fundamentals, the call is often ‘underweight’, not ‘sell’.

In a rising market, like the present one, it would almost sound blasphemous to ask investors not to buy any stock. But a liquidity-driven rally often carries all the stocks along with it, which results in putting a few bad apples in the basket with the good ones. It is possible that a similar situation may have arisen in the ongoing rally, considering that stocks across sectors have risen sharply without much change in business fundamentals.

For instance, take the realty stocks. They have been among the biggest gainers in the ongoing rally. But fundamentally, nothing has changed. The interest rate cycle has peaked, but it may take at least a quarter before rates begin to fall. Realty demand has fallen and prices are softening in key markets. In many other markets, inventory levels are very high and many projects have either been put of hold or delayed. At the company level, many are being forced to sell land banks or other assets to reduce debt.

Under the circumstances, have these companies suddenly turned value propositions simply because there is a rush of liquidity, mainly from foreign institutional investors? Now, there a likelihood that the ‘bad apples’ that have seen a bounce in this rally will be the first ones to take a dive when the liquidity gets over and the market starts weakening.

However, the exuberance in the market is so high at the moment that few people will stick their neck out to tell you not to buy this stock or that one.

“We don’t wish to avoid anything at this moment,” said Rajesh Jain, executive vice-president and head of retail research at Religare Broking. Jain’s argument is that investors should not bother much about short-term fluctuations. Instead, they should use the situation to acquire stocks for long-term play.

“One should not forget that investing in equities is always risky. One should not allocate all the money to equities at one go and invest only with a long-term horizon. It is advisable to take an informed view and start accumulating stocks slowly by investing 20-25 per cent every month and then wait for long-term capital appreciation,” Jain said.

He also insists that diversification of portfolio is important. “One should have patience with investment. Gains may not happen in the short time, as the macro situation will improve only slowly. So taking a long-term view would be more beneficial,” he said.

But there are others who talk more matter-of-factly.

Amar Ambani, head of research at IIFL, advises investors to avoid exposure to the real estate space. “Demand is falling in key markets and progress is slow in many projects. We also hear that developers are borrowing money at extremely high rates of interest. We are seeing strength in some realty stocks due to the liquidity rush. Direct investment in property or through real estate funds is a better way of taking exposure to real estate at the moment,” he said.

Ambani also said infrastructure and construction stocks are best avoided at this point. “Given the government’s fiscal constraints and various bottlenecks, major order awards are unlikely to come anytime soon. The guidance from industry leader L&T is poor. Given the idle capacity, aggressive bidding will be seen for tenders released, which would impact margins,” he said.

The ongoing rally has created huge divergence between market valuations and historical averages across sectors. The auto sector’s PE now stands at 11.1 times, which is at a discount to the long-term average of 12.4 times, although the sector now trades at a 23 per cent discount to Sensex compared with its long-period average discount of 28 per cent.

According to brokerage Motilal Oswal, PSU banks trade in line with the historical average discount (54 per cent) to Sensex price to book (PB) ratio. SBI, PNB, Union Bank, BoI trade at 10-20 per cent discount to average historical PB ratios. But private banks trade at parity with Sensex PB compared with the historical average discount of 10 per cent. Axis Bank is the only stock to trade at 20 per cent discount to historical PB while ICICI Bank now trades at a 10 per cent premium to historical PB.

Most cement stocks are trading at a premium to historical EV/Ebitda with the exception of India Cements, which continues to trade at a historically low valuation. Capital goods stocks are trading at the largest discount to historical average valuations (Bhel – 50 per cent; L&T — 29 per cent; Crompton Greaves – 24 per cent). Technology stocks are trading in line with the historical average PE.

IIFL’s Ambani warned that many of the small-cap stocks, which are in action, are best avoided unless the rationale is well understood.

Sudip Bandyopadhyay, CEO and MD of Destimoney Securities, also has a problem with realty stocks. “Most realty companies suffer multiple ailments. Corporate governance is weak and unrelated diversification has taken a toll on their balance sheets resulting in high levels of debt. Under the circumstances, real estate stocks, generally, are avoidable,” he said.

But one can still look at realty players with impeccable governance and track records, subject to valuation being right, such as Godrej Properties and Oberoi Reality, he said.

Another segment Bandyopadhyay finds avoidable is the metals sector. “These stocks may remain subdued over the next financial year due to softening of demand in China, which is the largest consumer of metals, due to the global slowdown and planned cooling off,” he said.

Sanjeev Zarbade, vice-president (private client group research) at Kotak Securities, said investors need to follow sector-specific strategies from here on. “Some profit booking can be done in capital goods and utilities segments now,” he said.

Bandyopadhyay advises investors to deploy only around 50 per cent of their equity allocation at present level and wait for the market to see some correction before deploying the balance amount. “While valuations are even now attractive in select stocks and sectors, a bottom-up approach should work better,” he said.

bijoysankar@mydigitalfc.com