After a stellar FY24, Krishnan V R, Chief of Quantitative Research team at Marcellus, believes there is less chance of the market repeating the roughly 29% returns achieved last year. For the broader markets as well, he doesn't expect the FY24 performance to repeat this year given small and mid-cap indexes were roughly up around 60% last year, far outstripping the largecaps.
He further noted that new investors who have entered markets since COVID have mostly seen the market trend in one direction which can engender false confidence of equity being a low-risk, high-return asset class. Given the current market context, V R believes new investors should temper their return expectations from equities to more reasonable levels and avoid chasing past returns.
Edited Excerpts:
Difficult to put a number but the last 4 fiscal years since COVID have been largely positive for Indian equity investors with Nifty generating roughly 20% annualised returns. Small and mid-cap segments have done even better. Nifty’s 1-year forward price to earnings is currently above long-term averages, but not unreasonably high. In the long term, earnings growth for largecaps can be expected to roughly follow the nominal GDP growth. Given this, I think there is less chance of the market repeating the roughly 29% returns achieved in FY24.
FPI inflows touched almost ₹2 lakh crores in FY24 which itself is a record after FY21. Flows were also positive in 9 out of the 12 months. This is against a backdrop of rather benign domestic macros with declining inflation, hopes of a rate cut in 2024, and lower policy risks beyond the general election. Given where the US bond yields are today, there is a higher chance of rates trending lower, which should help FPI inflows in FY25.
Because the small and mid-cap segment in India includes everything apart from, say, the biggest 100 stocks, it offers plenty of opportunities to pick good quality businesses with strong growth companies runway. Smaller companies can grow faster than the nominal GDP, unlike largecaps. For the broader markets, however, I don’t think we should expect FY24 performance next (this) year given small and mid-cap indexes were roughly up around 60% last year, far outstripping the largecaps.
New investors who have entered markets since COVID have mostly seen the market trend in one direction which can engender a false confidence of equity being a low-risk, high-return asset class. Equity markets inevitably go through drawdowns and it is important to be patient by staying invested through bear market phases to realise long-term return potential in stocks. Given the current market context, I feel new investors should temper down their return expectations from equities to more reasonable levels and avoid chasing past returns.
We don’t forecast markets in the short term. As highlighted above, we expect Nifty to compound roughly in line with nominal GDP growth over the long term
Private banks and FMCG underperformed broader benchmarks last year. Nifty Private Bank and FMCG index were up roughly 17% and 21% respectively versus around 29% for Nifty. Rally in some PSU stocks appears to be driven by expectations, as the government is using these companies to execute its projects such as that in defence. Going forward, actual earnings growth and order execution will become more important. PSU bank earnings have also grown from a lower base as their non-performing assets have normalised. Our style of investing, however, remains sector agnostic and we look to invest in high-quality companies with clean accounts, strong balance sheets, returns on capital greater than the cost of capital for long periods of time, and available at reasonable valuations.
As highlighted above, we are more bottom-up investors with a focus on quality. To the extent quality has underperformed over the past 2-3 years, we reckon it should make a comeback this year.
Compared to other major countries we seem to be better placed at least from the macroeconomic angle. From the Indian equity market perspective, the last few years have seen a fairly large number of new equity investors, who are investing through mutual funds or even directly. For instance, the number of demat accounts jumped by almost 30% in CY2023. India is seeing a structural trend in the financialisation of savings where households are investing more in financial assets over real estate and gold. We believe this trend should keep retail flows buoyant.
Initial public offerings typically follow market cycles, so it is no surprise that primary markets saw robust issuance activity in FY24. So IPO trends next year should depend on equity market returns and investor sentiment.
If you look at the last decade, gold and term fixed deposits have returned roughly 6.5% and 7% per year respectively. Over this period, the annual inflation in India averaged roughly 6%. During this period, the Nifty index returned around 12% annualised. Difficult to compare real estate as it is location-dependent and generally illiquid. Given India is a growth market, I cannot think of any other liquid asset class other than equities that can sustainably offer inflation beating returns over the next 10 years. Specifically, within equities, given high inflation and rising interest rates, we recommend sticking to companies with strong pricing power and strong debt-free balance sheets. Also, I would recommend readers articulate their financial goals to their financial planner who can help create a suitable asset allocation plan which is reviewed periodically.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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