Markets are correcting. It’s time to consider contrarian investing.

A correction was due any which way, as valuations were stretched. Whichever parameter you take for valuation—price-to-earnings ratio (PE), price-to-book value ratio or market capitalization to gross domestic product (GDP)—were overvalued. 

The gauge for this is the current reading vis-à-vis the long-term average and how far the current level is. Valuations were more than one standard deviation away from the long-term average. There had to be a trigger for the correction.

That trigger came in the form of weak earnings growth, softer GDP growth (5.4% in July-September 2024) and selling by foreign portfolio investors (FPIs). Selling by FPIs has to be put into perspective. In October 2024, their net sales were the highest ever in a span of one month. Even now, in January 2025, they have been sellers. However, what is missed in these discussions is that they have invested heavily in primary issuances. That is, to an extent, they have shifted from secondary to primary. 

In a correction phase, market sentiments are weak and events—which otherwise would not have made a dent—impact markets adversely. The new administration in the US has taken certain measures on international trade tariffs, though not on India yet. There is moderate volatility in crude oil prices, which is nothing unusual. The rupee weakened from 83.45 in September 2024 to 87.7 last week. This also has to be seen in perspective: The rupee weakened less against the US dollar than other currencies.

All these led to the correction. At the Nifty 50 level, from the peak in September 2024, the correction has been approximately 12%. However, it is very stock-specific. The correction is much lower than 12% in certain stocks, and in certain stocks, it is much more than 12%.

Way forward

There is no concern about India’s structural growth story, though some FPIs may think so. Whether some more correction would happen is anyone’s call, but it is not possible to catch a market top or bottom. 

Earlier, there were concerns about rural demand due to lower agricultural growth. Now, rural demand has recovered, but there are concerns about urban demand. The Union Budget 2025-26 has addressed that by changing tax slabs and putting money in the hands of consumers. The Reserve Bank of India (RBI) has supported the budgetary move by cutting interest rates. 

When the GDP growth rate eased to 5.4% in the September quarter, there were concerns about a slowdown. However, the projected growth rate for the full year 2024-25—the consensus view of economists—is around 6.5%. Economists forecast a growth rate of around 7% in the second half of 2024-25—1 percentage point higher than in the first half.

The trend in GDP growth rate over the medium term, as anticipated by the majority of economists, is 6.5%, which is a tad lower than projected earlier. However, even at this rate, India remains the fastest-growing major economy in the world. 

The corporate earnings growth rate has also taken a beating, but everything goes through cycles. Economic and industrial variables have different impacts on different companies, which creates a scope for picking stocks.

Contra investing

Contrarian investing starts with identifying market trends or sentiments and looking for discrepancies between market sentiment and fundamentals. The fund manager has to identify stocks priced lower than intrinsic value and invest against prevailing sentiments. 

The fund manager has to sell when market valuation aligns with intrinsic value. There is a difference between contra investing and value investing. Value investing is about under-discovered stocks, where it is expected that the market would realize the potential over a period of time. Contra investing is about going against market sentiments and picking stocks.

Stock picking is crucial in contra investing; you must go with fund managers with a proven track record. In the mutual fund space, Securities and Exchange Board of India (Sebi) regulations allow a mutual fund to float either value or contra fund, and only a few asset management companies have contra fund per se. 

Rather than going with straight-jacketed large-cap or small-cap funds, multi-cap funds are better as there is a minimum mandated allocation to various categories. The correction in mid-and small-cap stocks has been higher than in large-cap stocks.

Views are personal. 

Joydeep Sen is a corporate trainer (financial markets) and author.