Naveen Kulkarni, Chief Investment Officer, Axis Securities believes that the benchmark equity indices BSE Sensex and NSE Nifty will continue to deliver a double-digit return to investors in FY23. In an exclusive interaction with Business Today, he also shared his views on sectors that may outperform going ahead and how investors can allocate their wealth in the next financial year. Edited excerpts:
Business Today (BT): How much average return do you expect from Sensex and Nifty in the next financial year?
Naveen Kulkarni (NK): Corporate earnings remain resilient in FY22 to date irrespective of the fact that markets have seen two waves of Covid-19 in the current fiscal. Cumulative and rolling net profit of NSE 500 universe in last four quarters has touched an all-time high level (crossed Rs 9 lakh crore in Q3FY22). Moreover, loss-making sectors have turned positive and contributed significantly to net profitability, over the period. ROE for the broader market, too, is improving, after a muted performance for several years.
Overall, the Indian market has entered into an upcycle of earnings with an expectation of 20 per cent Nifty EPS CAGR growth over FY21-24, which was in a single digit of 7 per cent over FY09-21. We believe the market will likely follow the double-digit earnings growth in upcoming years.
We continue to hold a positive long-term view on the market supported by the emerging favourable structure, as increasing Capex spending is enabling banks to improve credit growth. Moreover, the overall boost in the Union Budget 2022-23 expenditure will help deliver broad-based growth in FY23. We maintain our Dec’22 Nifty50 target of 20,200, valuing it at 22x FY24E earnings.
BT: Which themes do you think may deliver a solid return to investors going ahead?
NK: An investment strategy in the current environment would be focused on fundamentals and it is recommended that one should remain invested in the market as the long-term story for the Indian market remains intact. Additionally, the Russia-Ukraine conflict allowed investors to increase the exposure to the under-allocated equity. Large-caps will find an edge in the short term. We believe style and sector rotation will be the key factors to achieving satisfactory returns, moving forward.
a) The quality theme may outperform the broader market from the current levels considering a notable market correction and significantly increased volatility in the last three months. Furthermore, quality stocks would provide superior long-term risk-reward in the current environment. Hence, large-caps will find an edge over the broader market for the short term. Once the heat between Russia-Ukraine settles, value is likely to emerge in the small and mid-cap space, providing attractive investment opportunities in the broader market as the earnings outlook remains constructive.
b) Secondly, we are seeing inflation as a big theme. Value-focused sectors are more inflation proxies and tend to do well in rising inflationary scenarios, and we are likely to see a good amount of allocation happening in the next one to two years in value focused sectors.
BT: What is the right portfolio allocation strategy now?
NK: Investors should focus on the asset allocation based on the risk appetite and the timeline of the investment.
BT: What are the key risks you see for the equity market in the next financial year?
NK: In the medium term, geopolitical development and other macroeconomic factors like rising oil prices, bond yields, and the interest rate trajectory will be the key events driving the market performance. Apart from that, inflation is a key risk, and the current rising crude and commodity prices have increased the expectations of higher inflation in FY23. Volatility is here to stay for some more time before we conclude a concrete market direction.
BT: Which factors do you think will drive markets going ahead?
NK: Corporate earnings remain resilient in FY22 and are likely to be robust in upcoming years, and that will likely drive the market fundamentals. In addition to this, valuation looks attractive after the recent correction, and long-term risk-reward is favourable. Positive structure emerging with higher government Capex spending, rising inflation is a global concern, and equity is the only asset class to deliver superior returns over inflation in the longer run. Hence, retail participation and domestic flows are likely to sustain in the medium term due to limited options available in other asset classes.
BT: How do you see inflows from foreign institutional investors and domestic institutional investors in the next financial year?
NK: Domestic investors are supporting at every level of FIIs selling in the last 5-6 months. In the near term, FII flows are likely to be volatile led by geopolitical tension, rising oil prices, rising bond yields, and the high volatility in the currency market. The second half of the current calendar year is likely to be more stable. In the second half, FIIs are likely to regain confidence in the emerging market, especially in India, where the overall fiscal deficit and the growing phenomenon will play out as the earnings expectation from corporate India is intact.
BT: How aggressive rate hikes by global central banks may affect sentiments back home?
NK: At present, the market has factored in the current trajectory of the rate hikes in CY22. The market is currently not priced-in for the aggressive Fed stance if they foresee a sharper pickup in inflation. We have to wait and watch to see at what levels these commodities and oil prices settle.
BT: How do you see the earnings of Nifty companies in FY23?
NK: Overall, the Indian market has entered into an upcycle of earnings with an expectation of 20 per cent Nifty EPS CAGR growth over FY21-24, which was in a single digit of 7 per cent over FY09-21. We believe the market will follow the double-digit earnings growth in upcoming years. At this juncture, 75 per cent of the Nifty FY23 profit is coming from the top four sectors – financials, oil and gas, metals, and IT. We think these four sectors do not face much downside risk to the earnings, related to the sharp rise in oil and commodity prices.