High valuations remain a challenge for the Indian markets, but could pick up as the year progresses, given other emerging markets have their own set of challenges. Naveen Kulkarni, chief investment officer of Axis Securities, tells Siddhant Mishra that markets will remain in a range-bound zone for now, owing to the ongoing readjustment between equity and debt. Excerpts:
How do you see Indian markets performing vis-à-vis other EMs this year?
India is still expensive compared to other EMs, but other countries have their own set of challenges with respect to growth, economy, etc. In terms of market performance, returns are likely to be back-loaded, and we could see the markets doing better as the year progress.
The market is slightly expensive on a FY24E basis, but it will do better once there is consistency in growth. At present, it will be in a range-bound zone given that we’re seeing a lot of readjustment between equity and debt, along with international equity and debt. This is because debt returns were not attractive earlier, but investors will start taking increasing exposure to duration funds seeing where interest rates are headed.
FPIs have pulled out close to Rs 28,000 crore so far in 2023. Is this trend set to continue?
FPIs will continue to sell this year. If dollar-denominated returns hover around 6-7%, and if Indian equities offer, say, 12%, it’s not too attractive. Because now you look at 6-7% in dollar terms, and 3-4% currency depreciation, which pushes the benchmark to 10-11%, over and above which there is an equity risk premium of 5-6%. Expectations of returns from Indian markets will lie in the 15-16% range. Therefore, FPIs will keep withdrawing until returns reach this level.
An absolute correction could leave the markets in a position where they show an upside potential of 20-25%, and that is when FPIs could make a comeback. However, at present, we just see a 13-14% upside, which isn’t too appealing. Possibly in mid-2023 or the latter half, we could see a 20-25% upside potential over the following one year, which is when we could see FPI money returning. DIIs will continue lending support for now.
Will the escalation of geopolitical tensions on multiple fronts surprise the markets?
I don’t see the China-Taiwan conflict having a major bearing on markets, though the Russia-Ukraine war continues to be a worry, as it has the potential for further escalation. At the same time, there could also be a de-escalation anytime, which could come as a relief.
On the other hand, the bigger concern is from our immediate neighbours, given the economic crises in Sri Lanka and Pakistan.
Which sectors are you confident on, this year?
BFSI is getting more interesting, given the strong visibility of earnings, especially in banking. The auto sector also looks good, with many challenges being resolved. Input costs are low, margins look exciting, and new product launches are happening. Not only that, a whole ecosystem of EVs is getting built. In addition, consumer staples and durables, too, look to be on a strong footing thanks to the amount of money being spent.
We should see the manufacturing space doing well this year, which makes industrials look attractive as well.
Does ESG stocks/green energy sector inspire confidence, given the push to the space in the Budget?
This has to be a profit-generating market first. Rather, we would be positive on companies supplying equipment to green energy vendors. The market is still in its early stages, with much left to be discovered with respect to the potential return on equity, multiples, etc.
It’s an extremely pragmatic market, in which one’s unlikely to get a high valuation. One can’t rely on hope alone; it depends on visibility and earnings. High valuations will face challenges if not backed by earnings, and will correct.