Expect moderate returns post Nifty 20k moment: Ashutosh Bhargava of Nippon Mutual Fund

Ashutosh Bhargava, fund manager and head of equity research at Nippon Mutual Fund, tells Moneycontrol in an exclusive interview that he believes that after the Nifty’s 20k moment, markets would give moderate returns for the next 6-9 months.

He believes too many IPO listings are not a great sign for the secondary markets. The flexi-cap fund manager expects FMCG earnings to see some visibility in the near term on the back of general elections.

Edited excerpts:

Recently, the Nifty touched 20k, after which the markets are slightly down. Do you think that the markets have peaked?

If you look at the last two years and look at the levels today, Nifty would hardly be 5 percent higher. However, certain pockets have done really well in the last six months and there has been a reasonable amount of time and price consolidation.

Today, Nifty is much cheaper, compared to where it was exactly two years ago. In the short term, there would be certain headwinds as we’re entering the election cycle. Other headwinds include factors like oil prices or global demand. There are also signs of exuberance in the kind of IPOs that are coming in. Therefore, we think that, from now till the general election, returns will be moderate. So, whatever you have seen in the last six months won’t be repeated in the next 6-9 months.

In the next two or three years, growth trajectory, and valuations… all are pointing towards double-digit kind of returns.

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There have been lots of IPOs and there is also good demand for them. How do you see this, going ahead?

In some ways, it is a very good sign that we don’t have to rely too much on foreign capital. At the same time, because so many companies are coming up with IPOs, there will be a lot of hits and misses. Not all these companies are going to create wealth in the future. So, I won’t say it is a bad thing, rather it’s a sign of strength of domestic capital markets.

However, the eagerness to list a company, the eagerness to invest with a shorter-term timeframe, typically, is not a great sign from a tactical perspective.

If this activity subsides a little bit, it would be actually good for the secondary market as the primary market absorbs a lot of liquidity, and then, liquidity that remains for the secondary market dries up. When it comes to expectations, investors should not become unrealistic. What happened in the last six months is very unlikely to be repeated.

How do you expect earnings to turn out this quarter?

We are witnessing economic growth, which is actually less than what we saw in FY23. But earnings growth are significantly better than in FY20. This kind of dispersion between economic growth and earnings growth is happening, as, last year, most of the companies suffered because of input cost pressures.

So the margins were weaker, while the top line was strong. Now, there is some pressure on top-line growth, but there is a huge tailwind in terms of margin improvement. We will continue to see reasonably strong and resilient earnings performance, at least for the next one to two quarters. And we will see some moderation in earnings, going into the next calendar year. But in the near term, I don’t think earnings, per se, will be a big challenge.

What headwinds?

Oil prices and uneven monsoon. If monsoon is uneven, then going into the festive season, you will start seeing some bit of demand moderation. If exports are weak because of China, you will see some bit of slowdown in those segments. And, obviously, in allied segments, like, say, commercial retail, etc.

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Largecaps were not able to pace up with smallcaps and midcaps. How do you see largecaps performing in the near term?

In the short term, largecaps tend to offer a more stable experience during bouts of volatility, given the uncertainties around elections and global factors. However, from a longer-term perspective, it’s not about size but about good management, addressable markets, and quality.

Multicap and flexicap strategies offer a versatile approach to investing, considering various size categories. While there might be a slightly better risk-reward ratio favouring largecaps in the short term, smallcaps are strong in terms of balance sheets and governance. Each size category taps into different profit pools, making them valuable in a diversified portfolio.

You have consumer goods in your portfolio. Considering the fact that monsoons would be scanty this year, is it a good idea to hold on to FMCG stocks?

Two to three quarters before the election, there is a lot of populism that happens. This helps in improving some kind of purchasing power. As we have entered the election cycle, some kind of income support would keep coming into the broader mass consumer segment. That’s where I think FMCG companies would have some kind of earnings visibility and support. But as a house, we are more committed to discretionary and premiumisation-related consumption and not through FMCG per se.

Your take on large-cap banking and PSU stocks?

Despite strong earnings, the banking sector has faced stock underperformance, which is rare when earnings upgrade usually drives stock performance.

This is attributed to several factors. Credit growth has exceeded expectations this fiscal year, standing at 18 percent. Credit cost, linked to asset quality, is in check, except for minor concerns in the unsecured sector. The primary reason for the sector’s underperformance lies in its exceptional performance last year. While other sectors struggled, banks thrived, enjoying margin expansion due to RBI interest rate hikes.

However, this year, the RBI’s decision to maintain interest rates, instead of cutting them has led to fears of margin compression. Yet, these concerns are possibly overstated. Banks’ EPS growth expectations are relatively low at 12-13, which seems achievable without significant risks. Large banks, both public and private, are attractive investments. Although they’ve underperformed this year, their valuations are reasonable, and they are well-positioned to meet the country’s corporate credit requirements for long-term capex.

Overall, the outlook for banking stocks appears positive, given their current valuations and fundamentals.

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What sectors should investors be cautious about?

We’re the least confident in sectors reliant on external demand, such as IT services and commodities. The immediate economic challenges in the US and China, affecting services and commodity prices, concern us. Despite headwinds, stocks in these sectors are not discounted. Instead, we’re focusing on domestic demand-driven sectors like banking, automobiles, and the power sector.

These include utility companies, lenders, and power equipment providers, presenting a three to five-year opportunity. We also see promise in consumer discretionary segments like hotels and hospitals due to favourable demand-supply dynamics.

What about media stocks? There is a lot of content lined up

Except for theatres, every other thing has normalised in terms of habit. I think media stocks are very compelling at this point of time. It is one of the last segments within the services segment that has picked up. I think, at this point of time, the risk-reward ratio remains compelling.

Do you expect premiumisation to drive growth, going ahead, in hotels?

Not just hotels. As the country’s per-capita income improves and urbanisation trends rise, credit penetration will increase. This positions premiumisation as a future opportunity. In the consumer sector, premiumisation can be pursued in alcoholic beverages, hotels, high-end fashion retail, and quick-service restaurants.

These segments align with the long-term trend of upgrading lifestyles and discretionary spending. Our focus remains positive on these sub-sectors for long-term growth prospects.

How is Nippon India Multi Asset Fund different?

In our Multi-Cap Fund, our approach is straightforward. We believe that Indian equities offer the best opportunities, making them our primary allocation at 50 percent. The remaining 50 percent is divided into three assets.

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First, 20 percent is allocated to international equities, tapping into global profit pools that Indian investors can’t access locally. Next, 30 percent is distributed equally between two assets: commodities and local fixed income. Within commodities, 10 percent is reserved for gold, providing a historical negative correlation with Indian assets, and balancing out overall portfolio performance. The remaining 15 percent is invested in high-quality government or private sector bonds, minimising credit risk and duration. This strategy simplifies asset allocation while maintaining diversification. It’s also tax-efficient, with a 20 percent capital gains tax and indexation benefits.

Have you revised your Nifty EPS projections for FY24?

There hasn’t been much change within the team. We have seen upgrades in segments like financials, autos, and utilities. We have downgraded the number versus the start of the year in metals, chemicals, and IT.

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