“After the recent correction, the markets are now trading closer to their estimated fair value,” said Vinay Paharia, chief investment officer at Union Mutual Fund.
The Nifty has corrected by 10.6% since its all-time high of 18,604 reached on October 19, 2021, on fears of a rise in oil prices, hike in interest rates, high inflation and geopolitical tensions between Russia and Ukraine, giving an entry point to investors. During the same period, the Nifty50 price-to-earnings ratio (PE) fell from 28.17 and now trades at 21.34.
Paharia believes rising input cost inflation could hurt gross margins and volume growth which could hit smaller companies hard and hence he prefers large-cap stocks over mid-cap and small-cap names. In a tough economic environment, large-cap companies can manage the stress better and have the capability to gain market share over mid-cap and small-cap companies.
“There is valuation comfort, given reasonable strong earnings growth expectations,” says Aniruddha Naha, head of equities at PGIM Mutual Fund. Naha believes long-term investors not bothered about near term volatility, could do a partial lumpsum investment and spread out the rest through systematic investment plans/systematic transfer plans over the next six months.
As per Bloomberg consensus estimates, analysts estimate Nifty50 earnings to grow by 16% for FY23 over that of FY22. The benchmark index currently trades at 19 times 2023 estimated earnings.
A report by Credit Suisse said that the GDP forecast of 7.8% for FY23 has already been upgraded by 80 bps since September 2021 and continues to believe India’s medium-term GDP outlook is improving. While the Indian equity market remains susceptible to global events, high oil prices, analysts believe the underlying fundamentals of the economy have improved with credit growth picking up. Omicron-led restrictions have had a limited impact on India’s overall growth and fund managers believe improved capacity utilisation could result in the restart of a new capex cycle.
“It is time to put some cash to use. The risk premium in mid-caps and small-caps continues to be high. Hence investors would do well to invest in large-cap or flexicap funds,” said Vishal Vij, founder, Nestegg Wealth.
While large-cap funds allocate at least 80% to the top 100 companies by market capitalisation, flexicap funds have a bias to large-cap companies though there is flexibility to allocate across market capitalisations based on where valuations are comfortable.
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