Retail investors rebalancing risk & return expectations: Pradeep Gupta

Anand Rathi Group continues to expect 10-14 per cent returns on bellwether large-cap stocks, says co-founder and vice-chairman Pradeep Gupta

The markets rebounded sharply last week as geopolitical anxieties about Russia and Ukraine showed signs of abating. Pradeep Gupta, co-founder and vice-chairman, Anand Rathi Group, tells Puneet Wadhwa in an interview the group continues to expect 10-14 per cent returns on bellwether large-cap stocks. Edited excerpts:

How are you viewing the outcome of the Assembly polls?

It was a very crucial (state) election from the Bharatiya Janata Party’s (BJP’s) standpoint because it was in power in four of the five states that went to the polls. Looking at the favourable position the BJP is in, the outcome gives it enough confidence to carry out policy reforms.

Is it a good time to buy now from a three- to six-month perspective or will there be better opportunities?

The deterioration of the macroeconomic situation, particularly the spike in inflation across the world, expectations of aggressive policy rate hikes by central banks, and geopolitical uncertainties have been the main factors behind the volatility and correction in the equity markets over the past few months. Since most of these risks persist, a possibility of a further correction in global equity markets cannot be ruled out. In such an eventuality, the Indian equity markets cannot remain untouched. Investors with a three- to six-month investment horizon need to be aware of considerable risks in such investment.

Which sectors can lend some stability to the markets over the next few months?

For a longer period, i.e. one year and above, we are positive on investment-linked sectors such as construction, infrastructure, cement, capital goods, and realty. We are also positive on financials. Similarly, consumption-linked sectors, including consumer durables, auto, fast-moving consumer goods (FMCGs), and retail-oriented sectors, may underperform during the same time frame.

That said, given the likely high volatility in the near-term and some level of investor risk aversion, value stocks are likely to outperform growth stocks in the relatively short term. During the same time frame, the defensive sectors might outperform the cyclical sectors, which is likely to reverse in the longer term.

To what extent are the markets factoring in the Ukraine-Russia developments and the rising interest rate scenario?

While there are theoretical reasons to expect that higher inflation and rising interest rates will impact equity markets negatively, in real life the impacts of these on equity markets are rather muted, especially over the medium term. Unless high inflation in the countries of the Organ­isation for Economic Co-operation and Development persists much longer than expected, monetary tightening in those countries will be much lower than what the consensus is. In that sense, while there can be significant near-term volatility in the equity markets due to higher inflation and the start of monetary tightening in the US, these are unlikely to materially change the course of corporate earnings or trajectory over the next one-three years. Much of the impact of these developments seems to be already in price — both in the bond and equity markets. A full-fledged war can have a significant negative impact on financial markets.

A month ago you expected large-caps to deliver 10-14 per cent returns per annum. Would you like to recalibrate this, given the recent developments?

We continue to expect 10-14 per cent returns on bellwether large-cap stocks. But this expectation is over a longer period. Since April 2020, small caps have outperformed both large- and mid-caps by a wide margin. At this point of time, given the uncertainties, the outlook for small-cap companies remains relatively subdued. Especially, over the next one year, the performance of small-cap companies is expected to be significantly lower than in the past two years. Yet, over the longer term, we expect mid- and small-cap companies to significantly outperform their large-cap peers.

How are retail investors approaching the markets now?

After seeing significant gains in their equity portfolio, retail investors are reb­a­lancing their risk and return expectations. On the one hand, there are indications that rather than directly investing in the equity markets, a large part of retail investment is now getting channelised through mutual funds. In terms of investment in mutual funds, retail investors are recalibrating the distribution between debt and equity in favour of the latter. There is also a considerable interest in exchange-traded funds and index funds.

Do you see all this denting corporate earnings growth?

Currently, the Nifty50 companies are maintaining over 100 per cent earnings growth over the trailing 12 months. We are likely to end this financial year with earnings per share for Nifty50 companies close to Rs 800. As of now, we are pencilling in earnings per share of Rs 880 for March 2023 and Rs 1,020 for March 2024. We have pencilled in the average oil price for the next one year between $80 and 90 per barrel.