Indian markets should do exceptionally well from now on believes Sunil Damania, Chief Investment Officer, MarketsMojo. In an interview with MintGenie, Damania said that at this juncture, we believe the pain is over, and investors can begin looking for gains. Even if your portfolio is down by 50 percent, his advice to investors is to remain calm and composed as this is not the time to get out of the equity market. He predicts Sensex hitting 1,25,000 by April 2027 and Nifty touching 37,000-mark. Edited Excerpts:
After 3 consecutive months of losses, some recovery is being seen in July. What is your view on markets for the short to medium term?
The Indian market has significantly underperformed since October 2021. There are two reasons for the Indian equity market's floundering since then.
For one, the Indian equity market performed exceptionally well post-March 2020 crash. In fact, Indian equities were among the best-performing markets. As a result, many investors thought it an excellent opportunity to lock in profits. At the same time, FIIs had turned into heavy sellers. Hence, given these reasons, the Indian equity market has seen a decline in the market cap since Oct 2021.
We believe that Indian markets should do exceptionally well from now on. Besides, we also think market sentiments around Diwali would be better. Some factors impacting market sentiments such as higher crude oil prices, high metal prices, the Russian-Ukrainian conflict, and inflation across the world have begun petering out. For instance, crude oil prices have started to reduce, and metal prices have declined. Inflation could also come under control, especially in India, where we have seen a decline in the CPI. Globally too, Central Banks have changed their tune and started suggesting that inflation is no longer transient but more persistent. Therefore, they have tweaked their policy actions to control inflation on a war footing. At this juncture, we believe the pain is over, and investors can begin looking for gains.
Rupee has breached 80 levels. What is leading to weakness in the currency and where is it headed?
One of the key reasons why the Indian rupee has come under pressure is higher crude oil prices and constant and heavy FII selling. However, both these factors seem to be waning. It seems the tide is going in favor of India and the rupee. So, while we had predicted correctly that the rupee would go to ₹80, we now believe there is no possibility of a further downside. Hence, we believe that the rupee could either remain at the same level of ₹80 or may appreciate in the next few quarters.
Sectors that are likely to benefit or be impacted the most from rupee depreciation and why?
I believe the companies or sectors that were significantly impacted were those that relied very heavily on imports. But would it drastically impact their profit and loss accounts? The answer is no. That's because several of these companies hedged their positions, anticipating that the rupee would depreciate. The problem with the currency occurs when one is not prepared for it. Fortunately, this time many corporates were expecting the rupee to reduce. Hence, we don't see much impact on various companies or sectors regarding rupee depreciation. Therefore, I don't perceive a situation that would result in a significant change.
What are your views on the earnings declared by India Inc? IT earnings were not very good, do you see a similar pattern for other sectors as well?
Several companies have released their June 2022 numbers. One theme clearly stands out: We see some softness in demand, especially in June and July. The commentary is a little cautious as we speak. While we do believe that No.1 and 2 quarters could face a challenge for India Inc., we think that the second half of FY2023 could see substantial growth in India Inc.'s earnings.
The topline of India Inc's earnings -- in companies that have declared their results so far -- has increased by 15% while the bottom-line by nearly 20%. But when we look at Quarter-on-Quarter, traditionally, the March quarter has always been a good one for India Inc. Hence, if we were to compare India Inc's QoQ earnings, we see a dip.
As far as the IT sector is concerned, we feel that the pain caused to the industry due to higher attrition rates seems to be now fading out. We believe that by Sept 2022, the attrition problem could stabilize significantly, which should aid Indian IT companies in doing well. So, yes, right now, the situation doesn't look very exciting. But going forward, the case would improve for Indian IT companies.
Where do you see this as a wealth-creating opportunity if someone has a 5-year time horizon?
We continue to believe that equities continue to offer an excellent opportunity to create wealth for five years. Equities are an asset class that should always be perceived from a 3–5-year horizon. Empirical evidence suggests that the Indian market has always given positive returns in a block of 3 years. Further, if an investor has remained invested for over five years, the probability of making money from the equity market rises substantially.
What would you advise to investors whose portfolio is down say 50 percent in value? How should one manage such a situation?
Many portfolios, including expertly-managed ones, have taken a very severe beating. Why is that so? Since Oct 2021, the market has been highly choppy. If your portfolio is down by 50%, our advice would be to remain calm and composed. This is not the time to get out of the equity market.
Our advice is to invest in the market if you have more funds because we believe the Indian equity market will perform remarkably well in the future. Our prediction for Sensex by April 2027 is 125000 and for Nifty 37000. If one's portfolio is down by 50%, we suggest reshuffling/relooking the portfolio; not necessarily that the company you are holding may move up in the next rally.
Markets typically find new leaders in every rally. Hence our advice would be to be stock-specific and examine every company held in the portfolio. For instance, you may want to ask - does it continue to merit keeping it? If not, you must book losses, move out of the company, and reinvest the proceeds in another good-quality company that will help you recover your money.
What is the right asset allocation mix in this environment? and 8. Do you think the 60/40 portfolio strategy is the way to go now?
Since we are bullish on the equity market, our advice regarding the right asset allocation mix is to always invest in equity. We firmly believe in allocating more in equities, provided one has the proper risk appetite. We opine that equities would emerge as the best-performing asset class across all other asset classes five years down the line.
Zomato stock has been a mess, however, the recent stock market crash was purely due to the lock-in period ending and not due to any change in fundamentals. Do you see it becoming a 'buy' at any point?
When Zomato issued their IPO, we advised our investors to avoid the same. One of the reasons we believe the company will underperform is purely because of its business model and the correct asset allocation. If you remember, Zomato began to underperform when it announced the Blinkit merger. Since then, it has been on a constant fall. Furthermore, the fall has been further aggravated post the one-year lock-in period.
We continue to believe that if you look at some similar kinds of businesses listed in the developed market, they too are struggling to get investors' attention. So, we believe that Zomato may continue to underperform even going forward. However, there could be a bounce back because the scrip has fallen substantially in the last few months.
There could also be a technical bounce back from the fundamental point of view. Hence, we believe that Zomato will underperform significantly in the overall market.
Banks have led the June quarter earnings so far. However, would you prefer sectors like metals making a comeback or banks which continue to have the highest weightage.
We get a sense that banks have done reasonably well. However, there could be one concern: investors would be very watchful of increasing the NPA. We say so because there has been precedence in the Indian economy. When the economy slows down and the interest rate increases, it tends to pressure the NPA. Hence, if NPA levels rise, it could create headwinds for the banking sector. Therefore, while we don't believe that banking has done well, we have also seen some vast diversions. Banks such as Federal Bank did exceptionally well. Others like RBL Bank went down substantially.
So, while one can take a stock-specific or bank-specific approach, we believe that banking as a sector will underperform.
As far as metals are concerned, they are a function of the global economy's health. Recent IMF cutdowns in global growth indicate that the demand for the metal will remain subdued. So, despite metals falling substantially, we don't see their valuations as attractive and would prefer to avoid them.
There is one segment – especially if you listen to the commentary by several of these companies – the capital goods that should do well here on. Of course, it is a bit early to come to a meaningful conclusion. But initial data suggests that the capital goods sector could outperform going forward.
Would you advise investors to focus more on mid and smallcaps or stay with large-cap stocks?
According to our IP, we believe that mid and small caps should do exceptionally well compared to large caps. Hence, as retail investors, one should allocate more towards mid and small caps, provided your stock selection within the mid and small cap is correct. We fear losses could be much higher if your stock selection is wrong.
