One should invest in Indian market for at least 3-4 years, says Sunil Damania of MarketsMojo

Sunil Damania, Chief Investment Officer, MarketsMojo, believes that the Indian market could provide returns in the teens in 2023, and has a Nifty50 target of 20,100 for this year. In an interview with MintGenie, Damania noted that the Indian equity market provides excellent investment opportunities and no investor should enter the market with a one-year time horizon. He advised investors to invest in the stock market for at least 3-5 years.

He also recommended staying away from booking profits in case of a record high and if liquidity permits, one should increase their allocation to equity.

Edited Excerpts:

In a year that started with multiple headwinds and crises, Indian markets are now less than 1 percent away from their peak. What changed?

There are a few factors that helped the Indian market to bounce back strongly. Pessimism has been replaced by optimism.

Let us start with FPIs. They were net sellers in the Indian equity market citing rich valuations. They have now made a significant comeback in the previous three months, pumping close to ₹50000 crore into the equity market. The best part is that the valuation is almost identical to when they sold.

So, what attracted FPIs to the Indian equity market is the great resiliency of the Indian economy. Despite global uncertainty, our GST collection is robust, suggesting that the Indian economy is performing well.

Now many of the factors that acted against us in the past are now working to our advantage such as the easing of supply chain issues, inflation coming under control, and central banks hinting that rate hikes may be paused or moderated.

Do you see the markets hitting the peak in June, or there will be some resistance?

We do not make short-term predictions because we are not experts in anticipating price movements. We forecasted in early 2023 that the Indian equity market would provide returns in the teens, with a Nifty 50 target of 20,100. We continue to feel that the Indian equity market provides excellent investment opportunities. We believe that no investor should enter the equity market with a one-year time horizon. One should invest in the stock market for at least 3-5 years.

If the markets hit their peak, what strategy should investors follow?

We advise investors not to book profits in the Indian equity market because we believe it will perform well. If liquidity permits, they should increase their allocation to equity.

Do you believe the valuations of the markets are fair or some further correction is needed?

There has been no downward revision to the earnings growth forecast after March 2023. The consensus estimate is that Nifty 50 could have an EPS of ₹975 by FY2024. That means the Nifty 50 is currently trading at 19x one-year forward earnings, which is in line with the historic average.

Which sectors would you advise investors to stay away from and which would you advise them to pick?

Our top picks remain pharma, owing to higher growth in the domestic market and the price of US generics stabilising. Many pharmaceutical businesses have attractive valuations. Given that the government proposed a massive expenditure of ₹10.5 lac crore in the current budget, capital goods and infrastructure companies should do well. Lower raw material costs should also aid in margin expansion.

We also prefer select IT companies. While we recognise that there are headwinds for the sector, most of them are in the price. Hence, risk-reward continues to favour select IT firms. We also prefer defence and railway stocks since the government will continue to spend a good deal of money on them.

According to you, in case of an all-time high, what constitutes the perfect model portfolio?

Unfortunately, many Indian investors do not use a portfolio approach. They select stocks at random, resulting in an imbalanced portfolio. Random stock selection never helps create market-beating returns. Hence, we advise investors to adopt a portfolio approach, while keeping their risk tolerance in mind.

A portfolio should contain no more than 30 stocks, with a reasonable mix of sectors and market capitalisation. If one is willing to take on more risk, they may want to invest more in mid-and small-cap stocks.

Meanwhile, the midcaps have hit their new high. Do you see them rising more now?

In early 2023, we predicted that mid and smallcaps would outperform largecaps. Mid and smallcaps outperformed largecaps in the first five months. However, we anticipate that the mid and smallcaps will outperform in the second half of 2023. Hence, investors who can handle increased volatility should increase their allocation to mid and smallcaps.

Similarly, for banks, what’s your outlook for this space?

Everything is going well for the banking industry, whether it is credit cost, deposit growth, or loan growth. NPAs are also on the decline. However, we estimate NIMs to moderate in the future, and loan growth to be 100-200 basis points lower. This can have an effect on earnings growth. At present, all positives are priced in, and if NIMs or NPAs rise, it could result in profit booking. Hence, we anticipate Bank Nifty's underperformance for the remainder of 2023. However, certain banks may fare well.

FPIs becoming net buyers is a key reason behind the recent rally. Do you think this trend will continue for the remainder of the year?

We believe that FPIs will invest approximately ₹1 lac crore in 2023. One of the reasons we believe FPIs will continue to participate in the Indian equity market is due to the great resiliency of the Indian economy. India is part of emerging markets, thus, when the risk-on strategy returns, the emerging market sees increased inflows. In the US, there is debate about cutting interest rates by the end of 2023. If this occurs, we may expect more capital to flow into emerging markets, with India getting its due share in that inflow.

One piece of advice for new investors?

The equity market is a place for creating wealth, hence, adopt a portfolio approach. Instead of trading, consider investing. Commit funds to the equity market for 3-5 years and don't panic if market sentiment turns negative. Avoid herd mentality by making volatility your ally. Any dip in the market should be viewed as an opportunity to increase allocation to equity.