Even as the headline indices Sensex and Nifty have soared to fresh record highs towards the fag-end of calendar year 2019, the rally has remained very polarised, with a handful of bluechip stocks accounting for most of the gains. The rally was more from the companies which were industry leaders, safe bets due to size factor, dominant in their respective businesses and participants in the indices, driven as a result of index based funds flow either in way of ETFs or some other passive strategy, says Narendra Solanki of Anand Rathi Shares & Stock Brokers.
Sushruth Sunder of Financial Express Online recently interviewed Narendra Solanki, Head Fundamental Research (Investment Services) – AVP Equity Research, Anand Rathi Shares & Stock Brokers, who shares his valuable insights on stock market in year 2019, his expectations for 2020, valuations of quality stocks, and factors that investors should consider before investing in shares. Here are edited excerpts-
How has year 2019 panned-out for stock market investors in your assessment? What your target on Sensex, Nifty for December 2020?
The markets in calendar year 2019 remained very narrow in terms of returns wherein we saw few set of companies out performing while more of the broader markets remain sideways or underperformed. The rally was more from the companies which were industry leaders, safe bets due to size factor, dominant in their respective businesses and participants in the indices which implies that it was more driven as a result of index based funds flow either in way of ETFs or some other passive strategy. As far as target for Sensex or nifty is concerned, we don’t release any targets but yes one can certainly expect earnings growth in a range of 15% to 18%.
Given that quality stocks are trading at expensive valuations, should investors stay away? Or will the rally continue to remain polarised, with these stocks sustaining expensive valuations?
It is true that quality stocks are trading at higher valuations and currently markets rally is very narrow in terms of breadth. Having said that, what one should also look at is that quality stocks have always traded at premium in India. For example if we see historic valuations of stocks like HUL and Asian Paints etc. than historically the have traded at more than twice the multiple of Nifty in good markets and at least 1.5 times the Nifty valuations in bad markets in last 20 years. In 2002, quality was trading at 25 times its earnings and nifty was at 13 times. Now coming to the question of quality stocks sustaining valuations. What we should expect is that definitely the risk reward equation has tilted more towards risk as of now but our assessment is that this is not significant enough to warrant major correction and at best we could see lack of appreciation for some time in these stocks till earnings catch up.
What factors should investors consider before picking up stocks?
We think investors should use a combination of factors at present which includes a mix of growth, value, quality and a bit of momentum as a strategy with varying degree of weights for different market microstructure.
Could we see some earnings recovery in the upcoming year 2020?
Definitely, we could see some earnings recovery in some pockets of the economy but betting on broad based recovery is somewhat unclear or to say evenly balanced between growth and risk as of now. For broad based recovery government has to come out with action plan sooner than later.
(Narendra Solanki is Head Fundamental Research (Investment Services) – AVP Equity Research, Anand Rathi Shares & Stock Brokers. The views expressed are his own)