Economists are projecting a growth of over 9 per cent in the next few years. What kind of returns can the equity markets generate during this period?
The two factors that drive markets are earnings growth and inflows. Both are in our favour and are expected to be higher than the figures for the past 10 years. India's share in the global GDP is close to 4 per cent, but our market capitalisation as a percentage of the global figures is only 2 per cent.
This suggests that we lag in listing businesses and in the share of the global portfolio. As the economy grows and new companies are listed, India's share in the global portfolio allocations will increase. All these factors indicate that the Indian equity markets will give much better returns in the coming decade.
What should be the current focus of individual investors?
They should focus on the domestic front. The markets have already recognised the popular sectors, mostly FMCG companies. They are not cheap and are valued reasonably well. Currently, the two sectors that look interesting are pharmaceuticals and capital goods.
Why have you zeroed in on these sectors?
Pharmaceutical companies are capturing both domestic and global opportunities, which is the result of economic compulsions. Instead of the expensive branded drugs, people are going in for cheaper generic options.
As for capital goods, we think orders for these companies will increase as investment in the economy rises. Due to the economic slowdown, the capex cycle in India has slowed a bit in the past three years, but these firms will benefit from the high GDP growth over the next 10 years.
What is your advice to investors who want to buy stocks?
Long-term investors should consider companies that offer high growth accompanied by high return on equity (RoE). The compounding impact will be extremely profitable. There are many businesses that have high rates of growth but don't generate cash or have a significant RoE. Such companies keep diluting share capital for growth.
Equity holders can gain if growth is accompanied by high RoE. Some infrastructure companies, whose businesses don't generate enough cash and always need extra equity, fall in this category.
Which are the stocks and sectors that investors can bank on?
Again, a key sector at this point is pharma. We recommend Lupin. In the domestic space, we suggest Asian Paints, M&M in the automobile space, and Thermax, Exide and Lakshmi Machine Works among capital goods. Axis Bank can generate good returns in the banking sector.
There are apprehensions about valuations being close to historic highs. How should investors look at the markets at this juncture?
Nobody has ever been successful at timing the market, but to catch a broad trend, consider 2011-12. The Nifty EPS is estimated at Rs 420-425, based on which the PE is about 14.5-15 times.
So one year from now, if we witness a sustainable 8 per cent GDP growth and a 20 per cent increase in earnings, one can expect a minimum of 20-25 per cent return on the index. Of course, there could be a 5-8 per cent correction at any time during this period due to our global links.