Pradeep Gupta, Co-founder & Vice Chairman, Anand Rathi Group, believes that at present, the results and market positioning are the key for short-term rally, however, the perception of extraordinary return from the market is not necessarily valid. In an interview with MintGenie, he advised investors to maintain long-term asset allocation and remain invested in the financial market. He further noted that the upside for mid and small-cap companies is likely to be greater than large-cap companies.
Edited Excerpts:
After hitting a record high in July, markets have now turned flat in the last 1 month. How do you expect them to perform going ahead?
Equity markets are volatile by nature in the shorter term and we witnessed key indices rally almost by 13.54 percent in the current FY. At present, the results and market positioning are the key for a short-term rally and the results season kicking in with better-than-expected results of a few major companies has further pushed and driven the short-term market sentiment.
If we look at the last one year, the Indian equity market has given over 20 percent return in terms of large-cap indices and over 30 percent return in terms of mid and small-cap indices, from the peaks of 2021 and 2022, the current annualised market returns are in the range of 4 to 7 percent and therefore, the perception of extraordinary return from the market is not necessarily valid.
Given the strong macroeconomic and corporate fundamentals and buoyant domestic and foreign money flows into the Indian equity market, the medium to longer-term perspective of the Indian equity market looks bright although some level of correction in the near term cannot be ruled out.
What domestic and global trends will impact the market performance for the remainder of 2023?
Over 80 percent of the world's top 100 economies are now growing their GDP. Many of these countries, notably the United States and some European economies, have had faster growth than expected. As seen by the International Monetary Fund's upward revision of the global growth estimate, the economic picture for the second half of 2023 appears to be improving. However, the likelihood of worsening in specific countries cannot be ruled out. For example, the consensus forecast predicts that the US economy would contract in the fourth quarter of 2023. The majority of available indications point to a healthy growth expectation for the Indian economy in the second half of the current calendar year. Overall, we predict India's GDP to rise at or near 6.2 percent in the current fiscal year.
Which sectors should one avoid in the current market environment?
We are less positive on global cyclicals and neutral on autos.
Foreign investors have also started withdrawing after consistently buying since April. What led to that? Will this continue going ahead?
Among the top 20 equity markets of the world by market capitalisation, the performance of Indian equities between 2000 and 2023 in U.S. dollar terms, on average, has been second only to Brazil for an investment horizon of one year. For others including 3-, 5-, 10-, 15- and 20-year time horizons, Indian equity has been the best performer among all the peers. The consistent top performance of Indian equities for over 20-year period is a strong reason for the continuation of cross-border portfolio equity capital inflows to India.
Also, during the same time horizon, India has made rapid transformations in almost all spheres including economic progress, infrastructure development, institutional strengthening, external sector health, and progress in science and technology. With such a multidimensional transformation, the outlook for Indian equities for the next couple of decades also looks promising. This is also a compelling reason for strong capital inflows towards India.
What strategy for equity investment would you suggest to someone who wants to start building a portfolio now?
Asset allocation, we believe, is the most important component of long-term wealth creation, accounting for nearly 90 percent of portfolio return. Market timing and the selection of specific instruments within an asset class explain only about 10 percent of portfolio return variability. As a result, we believe asset allocation decisions must be strategic rather than tactical, which primarily revolves around market timing and instrument selection. As a result, we do not advise our clients to make frequent changes to their portfolio positions based on market momentum, news flows, short-term events, or sentiments.
Despite large stock returns in the last 12 months, particularly for mid and small-cap-focused investments, the average annualised return on equity investment over the last two or three years has been in line with long-term trends. As a result, despite the temptation to reduce stock allocation in light of the recent run-up and the fear that the equities market may correct in the near term, I believe the best strategy is to maintain long-term asset allocation and remain invested in the financial market.
Apart from equity, which asset classes would you recommend for a model portfolio of a long-term investor?
As mentioned earlier, a proper asset allocation strategy basis one’s risk-taking capabilities is something investors need to consider while building a long-term portfolio.
Do you believe, as a whole, markets will deliver muted returns in 2023?
Indian markets are well positioned in the long term. The majority of available indications point to a healthy growth expectation for the Indian economy in the second half of the current calendar year. There is a strong positive correlation between India's annual equity market return and nominal GDP growth. We expect nominal GDP growth of 10 percent to 11 percent in the next 12 months, which should be in line with an 11 percent to 13 percent return for large-cap indices.
What’s the next big theme for markets that investors should now turn to?
We have a positive view about the revival of rural demand which is likely to positively impact consumer-oriented sectors and expect greater earnings traction for mid and small-cap companies versus large-cap companies. Consequently, we think that the upside for mid and small-cap companies is likely to be greater than for large-cap companies. Alternatively, we are positive on manufacturing, FMCG, and the revival of travel & tourism.
What’s the biggest challenge you are facing now with the markets?
High trailing price-to-earnings and price-to-book valuation multiples seem to be the key risks to the market. Also, the earnings expectations are high, and therefore during the results season if there is a big disappointment - that too can be a major risk. Lastly, the hostilities in Russia and Ukraine conflict seem to be escalating and the evolving situation can result in an escalation of food grain unrelated prices. This can negatively impact the financial markets.
Are you satisfied with the June quarter earnings?
Earnings growth for large and mid-cap companies has slowed overall, owing primarily to a high base effect. However, small-cap profits growth remains strong. Earnings growth during the most recent earnings season, in our opinion, has been largely in line with expectations.
