Nifty, which recently hit a fresh record high, may touch 20,000 in the next 18 months. Indian markets are trading above-average valuation, but as earnings will continue to grow in the next few quarters, valuations will adjust by 100-200 bps in the near term, said Sahil Kapoor, Head of Products & Market Strategist at DSP Mutual Fund, in a conversation with Shaleen Agrawal of FinancialExpress.com. Inflation is cooling off, and going forward, there will be some improvement in margins for auto, auto ancillary, and FMCG companies. Meanwhile, the near-term outlook for IT is a little weak. While margins will improve, sales will fall. There will be some deterioration in the BFSI sector numbers, but it will still deliver a good next quarter.
Sharp correction unlikely without a trigger, but watch these major risks
According to Kapoor, unless there is an unknown trigger, sharp correction is unlikely; however, valuation adjustment will happen gradually over the next couple of quarters. The major risk visible at the moment is India’s Balance of Payments. In the last six months, India has been running a trade deficit of $25 billion monthly. This comes out to be $300 billion annually, which is 8% of India’s GDP. The high number is a risk because India’s FII inflows have not been consistent, trade flows have been negative, and monetary policy is tight. This can result in a sharp reduction of liquidity, which is a concern for markets, Kapoor said.
Watch full interview with Sahil Kapoor of DSP Mutual Funds
Hedge against risk with these simple tricks
If crude oil prices continue to remain above $95-100 per barrel for the next 12 months, it could create a huge financial risk for India, where the only solution will be to slow down the economy by hiking interest rates aggressively and reducing crude imports. If the trade deficit is not controlled, currency can weaken sharply, which can lead to inflation getting out of control. In such a situation, the best way to hedge risk would be to remain in the short end of bond yields as the curve can help you out. Another way could be to maintain a risk-averse portfolio with exposure to debt. Buying into upstream energy companies can be a good bet as they benefit from the rise in crude prices.
Sahil Kapoor’s base case is slightly optimistic where he sees earnings growth of 12-15% in the next 12 months. The earnings growth will be supported by the BFSI sector which is a big component of the markets. With clean balance sheets, strong lending, credit growth, the BFSI sector is poised to deliver an earning CAGR of 15%. Over the next three years, Indian equities are likely to deliver a healthy performance, according to Kapoor.