Nifty50 @17,800 in a bull case scenario: Nitin Rao

“We expect the earnings growth to moderate for FY23 & FY24. We retain our base case for Nifty for Dec 2022 at 16,700 and a bull case of 17,800,” says Nitin Rao, CEO, InCred Wealth.

In an interview with ETMarkets, Rao, said: “For investors with adequate equity exposure, suggest keeping some dry powder to be added on market declines through CY2022. For investors with low allocation to equity, stagger investments over next 26 weeks can be a good strategy.” Edited excerpts:

How should investors deal with laggards in their portfolio?

The first thing we must realise is that the markets are following a typical cycle where we saw a good phase driven by liquidity expansion, which is now being followed by a corrective phase driven by higher interest rates and expectations of a recession.

In such phases, there will always be stocks and sectors which were over-owned, and which would correct sharply. The nature of the cycle will ensure that in time a strong recovery will follow after the market bottoms out.

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Thus, we have seen equity markets coming off highs from October last year. The majority of this correction can be attributed to (a) valuation derating in large and larger mid-caps and (b) correction in the mid and small-cap stocks which moved up without any substantial uptick in earnings.

A portfolio that is down 40% currently will have a mix of (a) and (b) above. My advice would be to use small rallies to exit category (b) stocks that are fundamentally weak and use that money to pivot to fundamentally sound companies in undervalued sectors like Financials, Auto, and Healthcare which still have enough headroom left.

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A small disclaimer would obviously be for all investors to moderate their near-term equity market return expectations and not extrapolate what happened in the CY20 and CY21.

Going by the recent data, SIP culture will only pick momentum in near future. What can a 20 Year SIP of more than Rs 1000 do to your overall corpus?

Future value on your SIP is a function of 3 things. (a) Investment amount (b) return generated (c) no of years of investment.

While the emphasis for most investors is on (a), what really makes an impact is the number of years you do your SIP. Even if you double the SIP amount, the final corpus is equivalent to a 15yr holding period vs 20 years.

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If someone in his 20’s wants to create a portfolio, should they bet on small & midcaps as Nifty50 companies are already matured in their businesses and growth models. What is the right way to look at the asset allocation mix?

In your 20’s an investor is at the peak of their human capital (earning potential) and minimal financial capital

(portfolio/savings). They can compensate for portfolio losses (if any) by their ability to generate income from their profession. This situation puts them in a position where they can take enhanced risks.

From an asset allocation perspective, I believe that investors should build goal-based portfolios within the overall portfolio.

Long term goals (> 5 years) should have a substantial allocation to equities which should be rebalanced towards debt as a financial goal approaches.

For goals like retirement, child’s education and marriage, which are far away in the future, investors should look at an aggressive allocation towards equity and have a substantial allocation within that towards small and mid-caps as they deliver higher long term returns when compared to large caps with some additional volatility.

In terms of stocks, I would focus more on small and midcap exposure. Also, allocation to emerging themes should be done even if it implies having exposure to large caps which are in a better position to establish market leadership in next generation themes.

What is your view on markets for the short to medium term?

While we have seen some sort of relief rally in July, we are cautious on the markets in the near term.

Clearly, July is seeing some form of bottoming out, with a strong dollar induced, lower commodity prices putting natural brakes on inflation and thus accelerating hopes that economies will bottom out faster.

This has resulted in interest in good smallcaps as also sectors like pharma and auto where we are seeing buying interest.

On the macro front, Geopolitical tension, central bank monetary tightening continue to create an uncertain environment for investors. On the earnings front, elevated cost pressures could result in weaker corporate earnings recovery trends.

Given these risks, we expect the earnings growth to moderate for FY23 & FY24. We retain our base case for Nifty for Dec 2022 at 16,700 and a bull case of 17,800.

For investors with adequate equity exposure, suggest keeping some dry powder to be added on market declines through CY2022. For investors with low allocation to equity, stagger investments over the next 26 weeks can be a good strategy.

Rupee seems to have taken the centre stage as it trades near the 80 levels. What is leading to weakness in the currency and where is it headed?

If you compare the fall in rupee vs other DMs and EMs, the rupee has been one of the least affected currencies.

Two major factors working towards a strong dollar has been the hawkish Fed and the possibility of slower growth globally which is causing money movement into US treasuries.

INR is trading around 102 basis REER – has come off from almost 103.5 in the end of May (1.5% depreciation in last month). INR has averaged 101.5 over the last 2yrs (0.5% lower than where the INR trades today).

This indicates that the INR is fairly valued against the other trading partner currencies. This leaves little scope for INR to appreciate significantly even in the near term.

Sectors that are likely to benefit or impacted the most from rupee depreciation and why?

Biggest beneficiaries are companies that export products or services, wherein Technology and Healthcare predominantly are the biggest gainers.

Apart from them, select companies in sectors like capital goods, textiles, Automobiles and ancillaries who have some revenue coming from exports will also gain with rupee depreciation.

The simple reason for export gainers is they would receive more INR against the dollar amount.

FIIs seems to be on a selling spree although the quantum might have come down. Is it the global realignment which is happening or there are other reasons for FII selloff?

We have seen FIIs selling for the past 10 months now. The amount of selling has eased off in the past couple of weeks.

We feel the reasons for FIIs are essentially risk off/ flight to own country strategies involving pulling out the money are a few like profit booking to some extent, redemption pressure in the US market with some of the Tech stocks tanking more than 50% as well as crypto as an asset class has seen good beating.

Also, we have seen higher interest rates in the US which augurs well for the FIIs investing in the US bond market, so some flow of money has been going there.

It feels like we are in a perfect storm – Sri Lankan crisis, Ukraine-Russia war, rupee depreciation, FII selloff, and not to forget boiling crude. Have you seen so many variables in the past and do you see this as a wealth creating opportunity if someone has 5 years or more?

We have seen financial crisis like GFC, multiple wars, healthcare scare of COVID, and other economic turbulences unfolding in the near 3-decade history of Nifty. Despite all these events, Nifty has delivered a 13.5% return since its inception.

Have realised that in any market cycle there will be some unforeseen events that will come and trigger a market and economic correction. Therefore, while events have happened, one is not nervous about outcomes from the markets with a long-term perspective

While economic variables will have to play out the full global cycle even domestically, we are seeing early signs of an additional capex cycle in the manufacturing sector along with a lot of continuing interest in new-age business development

Over a three-year time frame, we, therefore, expect a positive impact on corporate earnings, employment generation, consumption etc. which in turn makes this an attractive investment opportunity from first a 3-year perspective, and then through market cycles to a 5-7 year perspective.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)

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