Expert view: Expect moderate returns from the Indian stock market in Samvat 2081, says Rahul Jain of Nuvama Wealth

Expert view: Rahul Jain, President and Head of Nuvama Wealth, is positive about the Indian stock market in the long term. However, he believes the market may give moderate returns in Samvat 2081 due to stretched valuations and weak corporate earnings. In an interview with Mint, Jain also shares his views on sectors he is positive about and how one should invest in gold.

Edited excerpts:

How do you assess the market's performance last Samvat? What were the key highlights in your views?

Markets had a great Samvat, rallying more than 20 per cent. The key highlights of the year were:

(i) The broad-based rally in Indian equities with midcaps, small caps, and cyclicals (Industrials, real estate, etc.) outperforming the overall markets. This is in sharp contrast to global equities, where the rally was narrow, and most global indices, barring the US, are yet to reach their peak at the end of 2021. Even in the US, the rally is mainly in the top 7 stocks; barring it, the index is barely at the 2021 peak. Such a strong domestic rally is very encouraging and speaks volumes about domestic resilience.

(ii) India's strong growth resilience has backed the rally in an uncertain world - India was one of the few markets to witness high-teens earnings growth led by domestic cyclical like banks, autos and industrials.

(iii) The rise of domestic investors. The year was marked with solid inflows through SIPs - which is very encouraging and ensures that domestic participants enjoy the fruits of wealth creation.

(iv) The buoyancy in primary markets helps companies bolster balance sheets and pursue capex.

(v) It was a year with little/no turbulence on the macro front. Post-COVID, it’s been the rate cuts, the Russo-Ukraine war, and rate hikes that have shaped the year.

Last year had few such distractions. Global rates were at pause; there was no major geopolitical event, and domestically, the policy was quite clear with a focus on capex.

Do you expect the bull run to continue in Samvat 2081?

Markets seldom move in a linear manner. They, by design, have cycles, and it's very rare that returns in two years mirror each other.

Given the strong rally, some moderation in returns is only natural. For the next year, earnings could be moderate as margin tailwinds fade, but rate cuts should help.

Having said that, some consolidations only help bull markets to remain stable.

Also, the medium to long-term potential for India Inc. remains strong, given that it has come a long way in fixing the capital allocation and balance sheet issues prevailing pre-COVID.

However, given where valuations are, and earnings are likely moderating, one should expect more moderate returns during the year.

What are the key headwinds and tailwinds for the market in the new Samvat?

If one looks at the last Samvat, what worked for India was the moderation in oil prices, which helped earnings along with a revival in some of the domestic sectors like autos and a push towards capex by the government.

The strong DII flows further enhanced some of these tailwinds. However, exports remained a drag during the year, and rates rose.

For the next Samvat, headwinds could come from moderation in demand and margin tailwinds fading.

Also, valuations are on the higher side, which leaves little room for safety.

Tailwinds are likely to be some revival in exports, potential lowering of rates, strong balance sheets of corporates and increased focus on capital allocation.

What sectors would you recommend to bet on in the new Samvat?

If one looks at the Samvat’s post covid, there has been a different winner each year.

In the last couple of years, domestic cyclicals have been like industrials, while the first year post-COVID was led by IT, durables, metals, etc.

In my view, the next Samvat, it could be financial services. They have been a laggard and one of the few places where valuations are still quite cheap.

Also, their margins could be close to bottoming, and the focus here could move to growth rather than profitability.

The key risk to the sector lies in the potential deterioration of asset quality, but it may not be large, given that corporate balance sheets are strong.

Should we focus more on asset classes like gold when interest rates decrease and geopolitical concerns refuse to fade away?

Gold is undoubtedly the best asset to invest in during times of economic crisis and geopolitical tensions.

Given the current geopolitical climate and the slowdown in the global economy, gold is poised to perform exceptionally well in the coming period.

Over the past year, both equities and gold have delivered impressive returns for investors.

However, it’s crucial to recognize that gold cannot replace equities; both are vital components of a robust portfolio.

While equities create wealth, gold is a reliable store of value and a necessary hedge against uncertainty.

I firmly believe that every investor should have a well-diversified portfolio that has an allocation to equities, debt, and gold.

The proportions should be tailored to each investor’s risk appetite, investment timeline, and financial goals.

With interest rates expected to decline soon, fixed-income investors should focus on longer-term instruments offering higher yields, such as non-convertible debentures (NCDs).

It’s essential for investors to conduct thorough due diligence to ensure they are selecting high-quality investments.

How could retail investors protect their wealth in market volatility?

A well-diversified portfolio is crucial for building wealth with low volatility.

Asset allocation is the foundation of every portfolio. Hence, there must be a place for equity, debt, and gold.

For stocks, diversify across various sectors and market capitalisations. Ideally, have a portfolio with 30-35 stocks, with each stock having an allocation of 2-3 per cent.

When investing in mutual funds, ensure you're spread across different fund houses and market caps.

Diversified funds with a strong performance history must be preferred over thematic funds.

At best, thematic funds can have an exposure of 10 per cent of the total equity fund portfolio.

Invest gradually—lump-sum investments can be risky. A Systematic Investment Plan (SIP) is undoubtedly the best approach for investing in equity funds.

More importantly, remember that patience and unwavering faith in your investment strategy are key to long-term success.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.