The benchmark equity indices had a great run till recently when volatility amidst global and domestic headwinds gripped the markets. Investors are now concerned whether the returns can be replicated in the coming year and would the benchmarks scale newer record highs.
Leading market experts are of the view that Nifty’s downside from the current level is limited and one could see double digit growth in the coming year as well. They, however, also warn investors against paying high prices in overheated markets, reminding them of past cycles where leaders from previous bull markets eventually stagnated.
According to 3P Investment Managers' Prashant Jain, Nifty’s downside is limited, given its alignment with India’s economic growth. He expects positive returns, particularly from sectors like banking, which have reasonable valuations.
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"If you look at 10-20-year returns of Nifty, it is close to growth rates of economy in rupee terms. And there are large pockets of Nifty like banks which have underperformed where valuations are reasonable. These valuations have reset to the current growth outlook. So, I would, I suspect that the downside in Nifty is not much," he explained, adding that over time, Nifty should do well and deliver positive returns.
He further added that compared to other sectors, one is not seeing much of dilution in Nifty. "Banks are not diluting, software is not diluting, consumer is not diluting, large pharma companies are not diluting, large auto companies are not diluting. So, I think the supply of stock is huge in outside of Nifty companies, which is quite logical also," he said. Jain believes that given the persistent healthy flows that mutual funds are experiencing and lack of supply, Nifty valuations and returns should ultimately catch up with the broader indices.
Meanwhile, Manish Chokhani, Director, Enam Holdings, cautions that the market is "ahead of reality" and says that he would prefer Nifty to consolidate to avoid overvaluing his top holdings. "If we are double digits, I will be very happy. I will be happier if it consolidates, so I do not have to sell some of my darling companies because they get overpriced. And I can continue enjoying the compounding for a period of time," he said.
In a similar context, veteran investor Madhu Kela believes that estimating Nifty's movement is not relevant to bottom-up stock pickers like him even as he expects a range-bound market. "I think even if Nifty remains range bound, plus 2000 points and minus 2000 points, I do not think it impacts people like me who are bottom-up stock pickers. But would say that over the next six months, it will be broadly maybe range bound," he said.
Small and mid-cap continue to be gainers
While the benchmarks are often looked upon as the barometers of performance of the Indian stock markets, there is a much bigger universe of stocks outside the Sensex and Nifty and last one year have seen that segment outperforming the benchmarks by a huge margin.
Chokhani notes that in an around $5 trillion NSE 500 landscape, just 11 companies control about 25 percent, making sustained compounding a tall order for these giants. “Expecting these stocks to deliver significantly above single-digit returns for long periods is tough unless underlying returns improve,” he says. The next tier, comprising about 30 companies, Chokhani explains collectively holds around $1.2 trillion, averaging $40 billion per company. In the third quartile, 80 additional companies account for $1.2 trillion with market caps around $14 billion each.
But Chokhani says that the real focus is on the tail end with around 370 smaller firms valued at $3-4 billion per company. "That is really where a lot of the excesses have also happened, because in this euphoric rise, people are chasing momentum of earnings now and forgetting that there is a price to pay for everything," he says adding that one can have the best company in the world, but if you pay the wrong price, you spend decades correcting for it.
"This bull market also, if you look back, what the laggards of the 2008 global financial crisis, so real estate, infrastructure, power, capital goods, they didn't do anything for the last decade. And then they have come roaring back in the last 4 years. By the same token, the leaders of the last bull market of 2000 to 2020, which was HDFC Bank, Kotak Bank, Bajaj Finance, Nestle, Page Industries, they have not delivered returns commensurate to what the market has done now. But this is a cycle which plays out," he said.
Chokhani expects that in this cycle, one will get a lot more money going back to the these laggards. Attention has moved to sectors and stocks that previously underperformed like Coal India. He advises investors to focus on cycles and look for opportunities in these shifts.
"The story may just be starting for a lot of these now. So, you play these ebbs and flows. And that's really the only way to be placed in this market," says Chokhani.
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