ETMarkets Smart Talk: We expect Indian equities to deliver 12-13% returns in next 12 months: Naveen Kulkarni

In an interview with ETMarkets, Kulkarni said: “The challenges for the market will be the monsoon and upcoming state elections. A normal monsoon will be critical for keeping inflation under control” Edited excerpts:

The Indian market has steadily climbed the wall of worries and is trading closer to record highs. Weak global cues triggered some volatility, but where is the market headed in 2H2023?
Indian businesses are in a strong balance sheet cycle and will deliver returns in line with the cost of equity. In the next 12 months, we expect Indian equities to deliver 12-13% returns.

However, the challenges for the market will be the monsoon and upcoming state elections. A normal monsoon will be critical for keeping inflation under control.

Below-normal monsoons will lead to higher inflation and a decline in growth prospects, resulting in multiple compression.

Overall, markets are well poised to deliver healthy returns as the earnings growth trajectory continues to remain strong, and equity markets will see healthy double-digit returns.

You have been tracking earnings very closely – any standout themes which have come across from the recent numbers?
Q4 earnings season was as per expectations, with more companies meeting or beating expectations. Banks, Autos and Capital goods companies reported good earnings, while the IT sector missed expectations.

Overall, the earnings scenario remained constructive. The critical trends for the quarter were healthy revenue growth and margins primarily in line with expectations.

In addition, balance sheet quality continued to improve for most companies, which remains the most significant positive trend.

What is the sense you are getting from the management commentary? Are they more upbeat about the next few quarters as commodity prices have cooled off, or are there some concerns about a possible slowdown?
Management commentary has varied across sectors. However, commentary remains cautiously optimistic as there are slowdown challenges, but the margin scenario is improving.

In terms of valuations, how are Indian markets placed when compared to peers?
Indian equities continue to trade at a significant premium to the emerging markets. FTSE India trades a 76% premium to the FTSE Emerging Market index.

The premium is significantly higher than the long-term average of 40%. However, it is essential to note that this premium dropped from 110% last year.

Which themes are you tracking or likely to see some traction in 2023 in the run-up to the National elections exactly in the next 12 months?
Consumption theme should see traction in the run-up to elections. Election spending is an important theme. Also decline in commodity prices will also help in cooling the inflationary pressures, which could help consumption spending.

How do you pick stocks for your portfolio?
Our portfolio picking is based on top-down market regime modelling based on our quantitative models.

Our bottom-up stock picking is both themes as well quantitative models based. In a nutshell, we forecast the market volatility if it goes up or down.

If market volatility is likely to increase, we will reduce risk and portfolio beta. Once we have decided on adding or reducing portfolio beta, we pick stocks based on sectors that can perform well.

For example, if the market is likely to see a significant reduction in volatility, our focus will be to add BFSI stocks as they offer high beta play.

Once the respective sector focus is decided, stock selection is made based on a deep focus on fundamentals with a key emphasis on quality parameters.

Quality parameters are based on clean accounting norms, return ratios and management quality.

The tide seems to be reversing in favour of India as FIIs are buying Indian equities, and DIIs are booking profits. What has changed? Is it the economy or cool-off in valuations?
FIIs and DIIs are counterparties quite frequently. DIIs have been buyers in FY23, when FIIs have been significant sellers.

Thus, some selling from DIIs was expected, but DIIs continue to see consistent inflows and will soon be net buyers. FIIs’ buying patterns are difficult to predict.

However, this time the global narrative is that the interest rate cycle in the developed market has peaked, and there is a possibility of rate cuts in the medium term.

This is leading to some degree of risk globally, benefitting equity markets worldwide.

New demat accounts have come down according to NSE data. So can we say that initial euphoria among retail investors is coming down?
Investor euphoria has decreased significantly since the frenzy period in the IPO market in late 2021. However, the Indian investor has evolved and sees equity as a must-have allocation.

Thus, the demat account opening data could come down, but equity allocation will continue to rise.

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