The recent stock market decline in some of the 'story' investment and PSU companies may represent modest global risk-off sentiment, a shift toward defensives, and a greater emphasis on the firms' fundamentals, according to Kotak Institutional Equities' most recent strategy note. 

According to the local brokerage, 'narrative' equities remain utterly detached from fundamentals, with true values ranging from 10 to 50 percent of their current market capitalizations!

The local brokerage stated that railway and defense companies, including Mazagon Dock Shipbuilders Ltd, Bharat Dynamics Ltd, Cochin Shipyard Ltd, Hindustan Aeronautics Ltd (HAL), RailTel, Rail Vikas Nigam Ltd (RVNL), and IRFC, had suffered significant corrections since July.

Similarly, shares of EMS companies such as Amber Enterprises India Ltd, Dixon Technologies (India) Ltd, Kaynes Technology India Ltd, and Syrma SGS Technology have fallen since April. Utilities and oil and gas equities, including NTPC, ONGC, Tata Power, NHPC, CESC, BPCL, SJVN, and Power Grid, have also witnessed some selling recently.    

"However, we still see a large gap between the market caps and fundamental fair value of the 'narrative' stocks," according to the brokerage.

According to the brokerage, the modest correction in indices and substantial drop in 'story' equities in recent weeks might be attributed to deceleration in local investment mood, as well as a move in global sentiment toward a slight risk-off mode. It might also be attributable to a preference for defensives, which have boosted headline market indexes, as well as a potential move to fundamentals for 'story' equities.

However, general attitude remains optimistic, as seen by full-to-frothy values for the majority of sectors and equities, as well as substantial inflows into domestic mutual funds from price-agnostic investors, according to the report.

"We ascribe the shift in sentiment to a somewhat risk-off mode due to (1) recent economic data indicating a slowdown in the US; a slowdown may pose downside risks to earnings but potential rate cuts may be largely priced in; (2) continued stasis in China’s economic policies, which have resulted in a crisis of confidence among companies and households both and (3) continued insipid performance of the EZ economy," Kotak said.

Among India's 'global' equities, commodities stocks have witnessed a small drop, while IT services companies have held solid, according to Kotak.

Kotak, on the other hand, ascribed the recent advance in defensives like consumer staples to the risk-off mode, rather than high-beta investment equities. However, the defensive equities' high valuations complicate portfolio creation even more.

"We highlighted the likelihood of a gradual rebound in consumer staples volumes around 2-3 quarters ago, based on our assessment of increased affordability (greater income for low-income households and stable product prices). It remains to be seen if the much-anticipated revival in demand for IT services will be sufficient to support the substantial increase in their multiples," Kotak added.

According to Kotak, the 'narrative' equities trade at incomprehensible values, despite their supporting narratives being predicated on unsustainable growth and profitability expectations. Some 'narrative' themes, such as offshore and premiumization, have failed, while others, such as privatization of PSUs, profitability recovery, and sustainability, have persisted despite conflicting indications.