Time to be selective and cautious, says Sahil Kapoor of DSP Mutual Fund
Picks BFSI, healthcare and a few consumer firms as attractive bets based on valuations and consistent earnings growth
- Oct 3, 2023,
- Updated Oct 3, 2023 4:34 PM IST
Indian equity markets have delivered superlative returns to investors in the current calendar year. The benchmark equity index BSE Sensex has gained 8.19 per cent year-to-date. On the other hand, broader indices including the BSE MidCap and BSE SmallCap indices have rallied 28 per cent and 30 per cent, respectively, during the same period. Will this momentum be sustained? Or is it the right time to turn cautious? Sahil Kapoor, Head of Products and Market Strategist, DSP Mutual Fund, shared his insights with Business Today. Edited Excerpts:
Business Today: What insights can we infer from current valuations regarding future market trends?
Sahil Kapoor: Indian equities across market capitalisation are trading at rich valuations. Historical data shows that when Nifty traders above 22 times the price-to-earnings (P/E) ratio and at a return on equity (ROE) of less than 13 per cent, the 3-year forward return is less than 10 per cent CAGR. Mid- and small-cap stocks have also started to trade above their long-term average valuations. With sales growth slowing for more and more firms, margin expansion holds the key for the market to record gains. This is the time to be selective and cautious.
Business Today: Since you advised to stay cautious and selective, which sectors do you think one should look for in spotting for outperformers?
Sahil Kapoor: BFSI, healthcare and a few consumer names appear attractive, based on valuations and consistent earnings growth.
Business Today: Across various mutual fund categories, which types of funds would be suitable investments for the next five years?
Sahil Kapoor: At this time, given that equity valuations are not cheap, it makes sense to diversify across asset classes. A multi-asset allocation strategy is best suited for investors with a five-year long-term view.
Business Today: In light of the elevated FD rates and comparable taxation to debt funds, what should be the recommended fixed-income strategy?
Sahil Kapoor: The yield curve is inverted and disinflation is setting in. Investors with appropriate risk appetite should look to buy long-duration bonds with a focus on reduction in yields ahead.
Business Today: What should be the right asset allocation strategy considering the recent volatility?
Sahil Kapoor: A mix of domestic equities, global equities, Indian bonds and gold should be the ideal strategy. Investors can rely on well-diversified multi-asset allocation funds to achieve this outcome.
Business Today: The BSE Bankex has posted just 3 per cent year-to-date gain, making it one of the underperforming sectors in 2023. How do you view the future of this sector?
Sahil Kapoor: Banking stocks remain one of the cheaper sectors across the board. The price to book for lenders within the Bankex is now below 2 times which historically provides a decent margin of safety. The outlook is positive and investors should adopt a buy-on-dips strategy in this sector.
Business Today: The BSE Capital Goods sector has soared more than 40 per cent YTD. Is the current upswing in capital goods likely to endure for the next 12-18 months?
Sahil Kapoor: The capital goods sector is witnessing very strong order book growth and bill-to-book ratios. The ROEs and return ratios are also at healthy levels. However, the BSE Capital Goods index is trading 2 standard deviations above its long-term average valuations. Hence, the margin of safety is low in this space and a bottom-up focus has to be adopted.
Business Today: The healthcare index has also outperformed in 2023. What is your view on the sector going ahead?
Sahil Kapoor: In recent quarters, the US generics market for Indian players has seen growth due to reduced price erosion and new product launches. Supply disruptions, bankruptcies, and US FDA actions have also affected the market. The low prices in the US generics market were expected to normalise, a sentiment shared by the US FDA commissioner. In the domestic formulations business, strong double-digit growth has resulted in robust cash flows. Many companies have expanded their medical representative teams to enhance geographical reach and doctor coverage, with anticipated benefits in the near term. We remain positive on the US generics and domestic formulations business and the sector as a whole.
Indian equity markets have delivered superlative returns to investors in the current calendar year. The benchmark equity index BSE Sensex has gained 8.19 per cent year-to-date. On the other hand, broader indices including the BSE MidCap and BSE SmallCap indices have rallied 28 per cent and 30 per cent, respectively, during the same period. Will this momentum be sustained? Or is it the right time to turn cautious? Sahil Kapoor, Head of Products and Market Strategist, DSP Mutual Fund, shared his insights with Business Today. Edited Excerpts:
Business Today: What insights can we infer from current valuations regarding future market trends?
Sahil Kapoor: Indian equities across market capitalisation are trading at rich valuations. Historical data shows that when Nifty traders above 22 times the price-to-earnings (P/E) ratio and at a return on equity (ROE) of less than 13 per cent, the 3-year forward return is less than 10 per cent CAGR. Mid- and small-cap stocks have also started to trade above their long-term average valuations. With sales growth slowing for more and more firms, margin expansion holds the key for the market to record gains. This is the time to be selective and cautious.
Business Today: Since you advised to stay cautious and selective, which sectors do you think one should look for in spotting for outperformers?
Sahil Kapoor: BFSI, healthcare and a few consumer names appear attractive, based on valuations and consistent earnings growth.
Business Today: Across various mutual fund categories, which types of funds would be suitable investments for the next five years?
Sahil Kapoor: At this time, given that equity valuations are not cheap, it makes sense to diversify across asset classes. A multi-asset allocation strategy is best suited for investors with a five-year long-term view.
Business Today: In light of the elevated FD rates and comparable taxation to debt funds, what should be the recommended fixed-income strategy?
Sahil Kapoor: The yield curve is inverted and disinflation is setting in. Investors with appropriate risk appetite should look to buy long-duration bonds with a focus on reduction in yields ahead.
Business Today: What should be the right asset allocation strategy considering the recent volatility?
Sahil Kapoor: A mix of domestic equities, global equities, Indian bonds and gold should be the ideal strategy. Investors can rely on well-diversified multi-asset allocation funds to achieve this outcome.
Business Today: The BSE Bankex has posted just 3 per cent year-to-date gain, making it one of the underperforming sectors in 2023. How do you view the future of this sector?
Sahil Kapoor: Banking stocks remain one of the cheaper sectors across the board. The price to book for lenders within the Bankex is now below 2 times which historically provides a decent margin of safety. The outlook is positive and investors should adopt a buy-on-dips strategy in this sector.
Business Today: The BSE Capital Goods sector has soared more than 40 per cent YTD. Is the current upswing in capital goods likely to endure for the next 12-18 months?
Sahil Kapoor: The capital goods sector is witnessing very strong order book growth and bill-to-book ratios. The ROEs and return ratios are also at healthy levels. However, the BSE Capital Goods index is trading 2 standard deviations above its long-term average valuations. Hence, the margin of safety is low in this space and a bottom-up focus has to be adopted.
Business Today: The healthcare index has also outperformed in 2023. What is your view on the sector going ahead?
Sahil Kapoor: In recent quarters, the US generics market for Indian players has seen growth due to reduced price erosion and new product launches. Supply disruptions, bankruptcies, and US FDA actions have also affected the market. The low prices in the US generics market were expected to normalise, a sentiment shared by the US FDA commissioner. In the domestic formulations business, strong double-digit growth has resulted in robust cash flows. Many companies have expanded their medical representative teams to enhance geographical reach and doctor coverage, with anticipated benefits in the near term. We remain positive on the US generics and domestic formulations business and the sector as a whole.