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What is your near-term outlook for equity markets?
Predicting the near-term outlook on the market is akin to crystal ball gazing, where the likelihood of being right is at best binary. Based on recent corporate results & commentary, we foresee that consumption, which had taken a hiatus after the festivities last calendar year, can resume its normal spending pattern by the end of this calendar year. This positive trend can have a rub-off on the overall market performance. Until then, we believe the market will predominantly remain in a consolidation zone.
What are the major triggers for the market currently?
We are closely monitoring factors that may have a bearing on the market, such as the current inflationary environment, the interest rate cycle and our position on the curve. The monsoon is always a relevant factor, particularly in terms of rural & semi urban demand and consumption. Additionally, this calendar year, we have a few large states slated to go for elections, which may also impact market participants’ views regarding political stability.
How do you see valuations across market capitalization?
After experiencing almost flat returns by Nifty during FY23, it is now trading at ~18x times the one-year forward P/E, which is close to the long-term average (LTA) multiple. Valuation for Nifty has corrected by around ~15% from the recent peak seen last in October 2021. When comparing valuations across market capitalization, the small-cap segment offers maximum comfort, as it is currently trading at a ~5% discount to the LTA while the mid-cap segment is trading around ~5% above the LTA.
Which sectors do you recommend?
We have maintained an overweight stance on domestic oriented sectors like lending financials, building materials, automobiles, capital goods and cement. The previous year witnessed a significant impact of inflationary pressure, which adversely affected the profitability of mid & small companies in particular. However, with interest rate reaching the peak of the cycle and inflationary pressure starting to cool off, one can expect rebound of domestic demand.
Which category of funds should distributors recommend to their clients in current markets and why (e.g. large-cap, multi-cap, small, mid-cap, etc)
Investments in MF should always come with a long-term horizon and it helps if one comes with a goal-oriented mindset towards it. For investors with a moderate to high-risk appetite, considering the recent underperformance of the small-cap category, we foresee good alpha opportunities in this space over the next 24-36 months. On the other hand, for slightly more risk-averse investors seeking lower volatility and holding a horizon of 5 years or more, a diversified portfolio like large & mid, flexi funds can make the cut
