The last five-year average P/E is close to 18.5 which makes the market attractive at 18,000 though our premium over emerging markets (EMs) is high due to their underperformance, said Amit Gupta Principal Officer and Fund Manager - Portfolio Management Services, ICICI Securities in an interview with MintGenie. Gupta is positive on domestic-oriented sectors like banks, industrials, consumer discretionary and chemicals.
We are near record high even as concerns linger. Is it the right time to enter the market?
Very limited Nifty stocks have participated in the current market upmove. Looking at improving fundamentals, we expect sectors like banking, industrials, pharma, consumer discretionary and chemicals to start participating now.
The lower commodity prices would drive the higher margins of commodity user companies in the second half of the financial year (H2FY23). Higher inventory cost is also absorbed so far. Investors should focus on investing in these segments.
Are you worried about the valuation of the market? What could be the magnitude of a correction if the market sees one?
Nifty earnings per share (EPS), has been growing with a 20 percent CAGR over the last two years and it has been upgraded further by 5 percent for FY23 and 7 percent for FY24. Excluding commodities, the Nifty earnings were revived by 32 percent in Q2FY23.
Nifty was overvalued in October 2021 with 23 times valuations and it became fairly valued in November 2022 near 18,000 when it was valued at 19 times.
The last five-year average P/E is close to 18.5 which makes the market attractive at 18,000 though our premium over emerging markets (EMs) is high due to their underperformance.
What are your views on the Indian macro situation?
India's manufacturing PMI increased to a three-month high of 55.7 in November exceeding market estimates of 55.
After reducing toy imports from china by 80 percent through QCO (quality control orders), the government is likely to come out with QCO on fan and smart meter imports.
India gets best ever aviation safety rank of 48 from 102 in 2018. It is better than China's aviation safety ranking of 49, Turkey's 54, Denmark's 55 and Poland's 60.
On the macro front, though the trade deficit remained elevated at $27 bn, inflation is likely to come down to 6 percent by the end of FY23. The bond yields in India have remained flat since May 2022 despite a rate hike. Now the bond yields are cooling-off with US inflation tapering off.
What could be the impact of a recession in the US and Europe on the Indian market?
India’s merchandise export has seen a decline due to the slowdown in the US and Europe. However, the merchandise export remained flat from 2012 to 2020 at $300 bn.
In the last couple of years, it has increased to $420 bn. With the US and Europe's slowdown, it can decline by $30-40 bn but the structural upward shift is already seen now.
What sectors are you betting on at this juncture?
We like domestic-oriented sectors like banks, industrials, consumer discretionary and chemicals. Manufacturing as a theme is likely to expand in the coming months on the back of PLI benefits and the China+1 strategy.
Highly unorganised sectors can be looked at as shifting from unorganised to organised which can lead to higher market share for the stocks in these sectors.
Banking stocks, especially, the PSU ones, have jumped remarkably this year. What is boosting PSU banks? Is there more steam left in them?
We believe the banking stocks should continue to perform. In Q2FY23, ex-commodities, 32 percent of EPS growth registered in Nifty which was majorly driven by Banks.
Out of ₹58,000 crore profit in banks, ₹26,000 was contributed by PSU banks and ₹32,000 crore by private banks. Considering the loan growth from all segments like retail, SME and corporates, the bank’s credit growth is expected to move beyond 20 percent.
Gross NPAs in the banking system have declined from 11.2 percent in 2018 to 5.5 percent in 2022.
The structure of the market is such that it can lure new and inexperienced investors to bet mindlessly. What should retail investors keep in mind in this market?
Investment should be done in quality stocks as the cost of capital is also elevated. One can have a combination of stocks which have performed in various time cycles like Asian Paints, Pidilite, etc. and the stocks which were not able to perform in the last whole decade and now are getting earnings tailwinds due to higher government expenditure, private Capex and housing revival.
Disclaimer: The views and recommendations given in this article are those of the analyst. These do not represent the views of MintGenie.