Expert view: Nikhil Ranka, CIO- Equity Alternatives, Nuvama Asset Management, believes the Indian stock market will deliver a 12 per cent CAGR return even as the upside looks capped due to stretched valuations. In an interview with Mint, Ranka shares his views on whether large-caps still have some valuation comfort and what sectors one should look at now.
Valuations have reached 19.8 times FY26E earnings, closer to long-term median multiples.
Hence, the near-term market upsides may be limited, and investors should moderate their return expectations in the near term.
Looking ahead to FY27 earnings, the fair value of the Nifty 50 could approach 28,000, suggesting that investors can still anticipate double-digit returns over an 18-month horizon.
Historically, markets have delivered a 12 per cent CAGR return, and we see no reason to believe that this will not continue.
Large-cap banking names are trading below mean multiples and offer value at the current juncture.
Given the challenges on deposit mobilisation and NIMs (net interest margins), most larger cap banking names, except ICICI, have de-rated to less than 2 times FY26 price to book (PB).
Asset quality for most banks continues to be robust, and as challenges on deposit mobilisation and pressure on NIMs subside, the sector should start to re-rate.
Apart from banking, speciality chemicals as a sector seems to have bottomed out, and valuations still look reasonable. So that’s another sector that we are positive about from here on.
On an absolute basis, most large names are trading close to their fair value on an FY26 basis. So, our base case remains that markets could see some time of consolidation before beginning their next upward move.
On a relative basis, large caps offer a much higher margin of safety than mid-cap names. Hence, at this juncture, large caps should have a higher allocation in one’s portfolio than midcaps.
A normal monsoon would provide a big sigh of relief to the markets in the near term, and agri-related stocks should see some rub-off effect from the above.
A section of markets is also worried as to how curbs on derivative trading would affect markets in the near term.
In the long term, we see these as transient factors, and though short-term market liquidity could be affected, these are unlikely to affect the strong long-term fundamentals of our markets.
US elections in November can bring some volatility in global markets, which could affect Indian markets as well.
Post-tax returns on debt instruments have fallen closer to 5 per cent post indexation benefit being taken away in Budget 2023.
With inflation hovering at similar levels, investors are increasingly seeking higher-yielding alternatives.
Historically, Indian markets have given double-digit returns over longer time horizons, and hence, we are seeing a higher allocation of household savings to equity markets.
In terms of taxation, equity also enjoys a lower tax as compared to debt, which further increases its attractiveness.
Asset allocation is the key to protecting wealth in uncertain times. One should diversify exposure across equities, gold, and real estate.
In equities, one should focus on stocks and sectors where market prices discount and reflect reasonable future growth expectations.
For risk-averse investors, increasing allocation to debt can also be a prudent strategy at this juncture.
Q1 Earnings have broadly been neutral for markets with no major upgrades or downgrades to FY25/FY26 earnings estimates. We continue to Expect Nifty to report EPS (earnings per share) of 1,130/1,260 in FY25 and FY26 respectively. IT, in general, has seen green shoots of recovery and has seen earnings upgrade. While on the other hand, banking has seen minor downgrades on account of NIM pressure.
Markets expect the RBI to start cutting rates from December onwards. Historically, rate cuts have benefitted equity markets, as the discounting factor for equities decreases during a rate-cut cycle.
This should also boost consumption, as outflows on home loan EMIs will decrease, leaving more money in the hands of consumers. For leveraged corporates, finance costs will begin to fall as rates decline, which could provide a fillip to their earnings.
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Disclaimer: The views and recommendations above are those of the expert, not Mint. We advise investors to consult certified experts before making any investment decisions.
