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Business News/ Markets / Stock Markets/  Less chance of market repeating FY24 returns this year, says Krishnan VR of Marcellus
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Less chance of market repeating FY24 returns this year, says Krishnan VR of Marcellus

After a stellar FY24, Krishnan V R, Chief of Quantitative Research team at Marcellus, believes there is less chance of the market repeating the 29% returns achieved last year. Given the current market context, he advised new investors to temper their return expectations from equities.

Krishnan V R, Chief of Quantitative Research team at Marcellus Premium
Krishnan V R, Chief of Quantitative Research team at Marcellus

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:

What is your outlook for the financial year 2025? How are markets likely to perform?

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.

Read here: Average daily turnover in NSE's equity cash segment sees massive fall in March but gains 98% in FY24

FPI flows have been very volatile in FY24. Do you see a similar trend in FY25 or an improvement is likely?

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.

What is your view on the accumulation of mid and small-cap stocks? Will this financial year prove equally profitable for the broader markets?

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.

Read here: FPI inflows in debt market at nine-year high of 1.21 lakh crore in FY24

What investment strategy would you advise for new investors?

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.

What is your Nifty target for FY25-end?

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

Which sectors would you advise investing in and which sectors to stay away from in FY25?

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.

Read here: Expert View | 'Nifty 50 upside capped at 24,300 in FY25'

Any contra bets for this year?

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.

What trends should investors look out for in FY25?

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.

IPOs have performed exceptionally in FY24. Do you expect a surge in IPOs in FY25 or a decline?

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.

Read here: From Swiggy to Ola Electric, 56 cos ready to raise 70,000 crore via IPO in FY25

What about other assets? Gold, realty, fixed income - if not equity, where should investors invest?

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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Published: 03 Apr 2024, 11:49 AM IST
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