Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services said that there are many stocks in the small-cap segment where retail exuberance is driving stock prices to unjustifiable irrational levels.

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In an interview, Gupta said that in the event of a big market correction, investors in penny stocks will lose heavily and may even lose even their capital.

Edited excerpts:

Q) Market closed with a loss of nearly 1% amid volatility. What led to the price action?

A) Markets have turned highly volatile, responding to alternate bouts of selling and buying. FIIs have been selling continuously and bears have been going short on stocks/segments where FII's holdings are large, and they expect FIIs to sell more.

DIIs, on the other hand, are buying aggressively, absorbing almost all of FII selling and retail investors too are buyers on dips. These alternate bouts of selling and buying are causing heightened volatility.

Q) The RBI governor referred Cryptos to Tulipmania (a speculative bubble). I am there are a lot of stocks that might be moving on hype as if there is no tomorrow. How can one spot these stocks and make an informed decision?

A) The RBI Governor has been warning against investors dabbling in cryptos since cryptos don't have any intrinsic value. It is like the Tulip mania.

There are many stocks too, particularly in the small-cap segment, where retail exuberance is driving stock prices to unjustifiable irrational levels.

Newbie retail investors are buying penny stocks and even stocks of companies in the liquidation process. This irrational mania happens in all bull markets.  

In the event of a big market correction, investors in these stocks will lose heavily. Investors in penny stocks may lose even their capital.

The only solution to this problem is avoiding low-grade stocks and buying high-quality stocks. But newbie retail investors, unfortunately, don't do that.

Q) What is your view on Sensex, Nifty for the coming week. Key levels and any big events to watch out for?

A) From April 2020 to November 2021, markets were in a one-way street, steadily going up. This one-way rally has ended.
US inflation has surprised on the upside and now the Fed is expected to raise rates by at least four times in 2022. US 10-year bond yield has surged past 2 percent.

This is a negative for equity markets. For India, Brent crude at $95 is a major macro headwind.

Q) Sectorally, the action was seen in metal space while the realty and capital goods sector close in the red. What led to the price action?

A) Daily price action does not indicate any trend. Profit booking can lead to correction in prices even when the stock/sector is doing well.

Q) Banking stock got a boost from RBI policy on Thursday and NiftyBank reclaimed 39000. What are your views on the banking space?

A) Financials, particularly banking, has the potential to outperform the market this year. Banks were underperforming since April 2020 on asset quality concerns.

But, asset quality has not deteriorated as much as feared. The credit cycle is picking up and profitability is improving as indicated by the Q3 results. Investment in high-quality banking stocks is advisable now.

Q) These top 4-5 stocks are trading near oversold levels according to RSI and MFI. Should one look at buying the falling knife?

A) High-quality companies with earnings visibility can be bought on declines. High-quality banking stocks are reasonably valued; high-quality IT stocks have high valuations but good earnings visibility. Both these segments can be bought on declines.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)