The year gone by – Samvat 2073 – was rewarding for equity investors.
Shrugging off concerns over weak earnings growth, the market put up a smart show. From last Diwali, the Sensex has gained 16 per cent, while the Nifty 50 is up 18 per cent — buoyed by the gush of domestic fund flows. But with overall earnings growth not catching up, the market is arguably in expensive territory.
The Nifty 50 and the Sensex now trade at about 23.6-23.8 times trailing 12-month earnings, higher than their five-year average of about 19 times.
How do fund managers expect the upcoming Samvat 2074 to pan out?
While most fund managers agree that the market seems pricey now, the views are mixed on earnings revival prospects and the market trajectory.
Gautam Sinha Roy, Senior Vice President-Fund Manager, Motilal Oswal AMC, strikes a cautious note by saying, “The market is expensive currently, with earnings recovery yet to set in. Meanwhile, unprecedented domestic flows continue to push the market up. The coming Samvat should see this tug-of-war between rich valuations and excessive liquidity come to some conclusion with either of the two giving way. Either earnings recovery should set in with full momentum, thereby making valuations cheaper, or excessive buying pressure must ease.”
Neil Parag Parikh, Chairman and CEO, PPFAS Mutual Fund, shares this caution.
“It is hard to predict broad market directions because it is influenced by so many factors. But we can see there are pockets of exuberance and certain areas where valuations haven’t picked up,” he noted
In his estimation, earnings growth recovery “has been long awaited. Some discretionary consumption and consumer lending sectors have seen a large uptick, but broadly it has been flat. If old capacity gets utilised due to global commodity price movements, some related sectors can do better than others.”
But some fund managers are optimistic about the road ahead.
Manish Gunwani, CIO – Equity Investments, Reliance Mutual Fund, says, “We have a constructive view on the market from a medium-term perspective as we believe both the global and domestic business cycle are on a revival path. Liquidity is benign both globally and domestically. We expect earnings to recover in FY19 due to multiple factors – effects of GST and demonetisation going away, global growth picking up, and credit costs coming down in the banking sector.”
S Naren, Executive Director and CIO, ICICI Prudential AMC, agrees.
“Various parameters such as credit growth, capex cycle, earnings growth and capacity utilisation are close to their cyclical lows,” he noted.
“Going forward, as capacity utilisation improves and credit cycle picks up, earnings too will catch up. Over the next two years, corporate earnings are likely to see a rebound, given that the transient effects of various reforms will completely play out,” he said. But Naren warns investors against exuberance. “If earnings were to come too quickly, investors may tend to extrapolate on high earnings and make big mistakes,” he adds.
Mahesh Patil, Co-CIO, Aditya Birla Sun Life AMC, is also sanguine about earnings picking up soon. “Globally, things are looking better, and India will catch up in the second half of the year. After the GST issues stabilise, Indian growth numbers will start to look good,” he said.
On the market trajectory ahead, Patil called for patience.
“At the current market levels, investors having a mid-teen kind of return expectations from a three-year perspective could be rewarded,” he added.
Some fund managers see value in beaten-down sectors. “ We find IT, pharma, upstream oil operators, power PSUs and corporate banks attractive at current valuations,” said Naren of ICICI Prudential AMC.
Others prefer sectors that are seeing earnings growth and favoured by the market. “We are positive on discretionary and rural consumption, private banks, NBFCs, oil & gas and metals,” said Patil.
Manish Gunwani of Reliance Mutual Fund is betting on both themes. “We like corporate lenders, pharma and logistics, apart from select stocks in the capital goods and consumer discretionary space,” he added.