India’s stock market has seen a dramatic rise since the outbreak of the pandemic. The country’s capitalization total surpassed the milestone of $5 trillion in May.
On September 27, last year, the BSE Sensex index (India’s benchmark) reached a record high of 85,978.84 rupees.
Investors are uneasy about the sharp drop in value of more than 10,600 points, which represents a 12% decline.
Foreign investors are selling heavily, pulling out 6 billion dollars from Indian equity in just January. However, record levels of domestic investments have stabilized the market.
The ongoing volatility of the market raises a question that is important: How long will this continue?
To get a deeper understanding of the market, ICD interviewed Sapna Nang, managing partner at Capital League. This is a prominent Indian boutique firm that specializes in wealth management.
She discussed her views on markets and why she believes investors can remain confident about India’s growth over the long term.
The following are excerpts of the discussion:
Invezz : How would you describe the current state of the market?
India’s strong long-term foundation is the first thing you need to know about it.
The structural changes which have occurred and are expected to continue in the future will be the driving force behind this.
Among them are a younger demographic, an increasing financialization in household saving, and widespread digitalization.
The Indian economy will grow at a robust rate if these conditions are met.
According to current projections, growth rates could be in the range 6.5% to 68%.
India is one of the most dynamic economies on the planet, despite periodic fluctuations due to global or economic factors.
India’s ROE is among the world’s highest
India’s domestic market consumes a large part of the corporate production.
It provides some protection from the global economic turmoil.
Investors, both domestic and international, are looking for markets that offer a clear return. These returns are driven primarily by earnings of corporations.
India has had one of the world’s highest average returns on equity over the last decade.
It is almost neck and neck with the US, which has a 15% rate, but it outperforms other countries.
India has maintained its premium position among emerging markets due to this strong ROE.
Over one third of Indian companies have ROEs exceeding 20%.
India is a great destination for investment because of its performance and the diversity of its booming sectors, including technology, IT, pharmaceuticals, etc.
Investor confidence is boosted by regulatory advancements
SEBI and other regulators have been working continuously to improve the Indian equity market.
The markets are more open and transparent thanks to initiatives such as digital investments, detailed account statements, strict checks and balances and nomination systems.
The regulatory easement has also been beneficial to foreign investors.
Last year, India was able to achieve a significant milestone when Indian bonds became part of the JP Morgan Emerging Market Index. This increased India’s appeal for global investors.
The government’s emphasis on economic stability is also intended to improve ratings by agencies such as S&P Fitch and Moody’s.
These measures are part of a longer-term strategy that will strengthen India’s credibility on the market.
Growth in revenue aligned with nominal GDP
After the COVID-19 outbreak, profits for corporations increased due to pent up demand and lower commodity prices.
This trend is a continuation of the previous three-four years.
As the market normalizes, earnings of corporations are expected to be more in line with growth in revenue, and nominal GDP will also grow.
The reversion of the mean to its natural state is part and parcel of an economic cycle.
The foreseeable future will likely see an equilibrium with earnings growing at the same pace as revenue, which is consistent with the nominal GDP.
Recent market volatility has been a result of short-term developments in the US.
India is still a very attractive investment destination for long-term. Its strong structural foundation, its regulatory progress, and the diversity of sectors it has to offer, ensure this.
Volatility in markets caused by developments in the US
The recent volatility of Indian markets is largely due to the changing policies in the US.
The newly-elected president announced that he would implement tariffs to protect the domestic industry and encourage onshore production.
Although these changes will take many years to become reality, they are already having an impact on global markets.
The Federal Reserve cut rates in September but yields for 10-year bonds rose, showing that the market is still skeptical of liquidity ease.
Although the Fed suggested that two possible interest rate reductions could occur in 2025 there are still uncertainties about these.
The main reason for this is that the policies proposed are likely to cause inflation.
These measures, while not yet fully defined in terms of their specifics (tariffs and taxes), could have a positive impact on the US stock market and corporate profits.
Many investors, including those in India, are therefore reallocating their funds back from the overseas markets to the US.
The trend in India is not the only one observed.
Capital outflows to the US from emerging markets are usually triggered by a stronger US dollar.
It is hard to determine the duration of short-term volatility.
Indian Stock Markets to Deliver 9%-11% Returns This Year
India’s stock markets have been supported by domestic investors despite the withdrawal of funds from foreign institutional investors.
The market has been stable in terms of performance on an annual level, and the decline is only 8% to 9% from its peak.
The Indian rupee has shown resilience as well.
The Indian rupee is the most stable currency compared to major currencies such as the euro, pound and yen. This reflects the strength of India’s economy.
Funds withdrawn from India by FIIs are a small fraction of the total amount invested in India. This shows the continued confidence that the Indian market has.
India is expected to remain positive in the medium-term.
The equity markets are likely to return between 9%-11% this year, compared to the 20% returns in previous years.
This trajectory could be altered by unforeseen events, such as the introduction of new US tariffs for Indian products or significant fluctuations in the dollar.
India is still a good investment option because of its robust economic fundamentals.
Add gold and increase exposure to large-cap stocks, while reducing mid-caps.
Invezz : Which strategic changes will you make to the portfolios that you manage in this period?
First, if 60% of your portfolio was allocated to stocks with large capitalizations, you might increase this to 65%.
Also, we are considering adding some gold to our portfolios.
In terms of international equity funds, over the last few years we have maintained an allocation between 10% and 15%.
We plan to raise this allocation from 2% to 3% as the limit has been relaxed, and when foreign funds are again available for subscription.
The core asset allocation of each client’s account remains largely the same.
If, for example, 60% of a portfolio’s assets were allocated to debt, and 40% to equity previously, then we will continue with the same structure.
We are currently neutral in our equity policy. We’re not taking a position that is aggressive, nor do we want to withdraw completely.
We are making some adjustments to the equity part, for example, increasing our exposure to large caps.
By the end of this year, mid-caps and small caps will make up around 35% of your portfolio.
Watch out for these sectors in 2025: Infrastructure, Defense, Metals, Cement, Real Estate
In 2025 the government will continue to allocate funds for infrastructure and increase its spending.
We’ll closely monitor how these investments impact the economy.
Recent reforms in the defence sector have created opportunities for foreign direct investments (FDI) and Indian defense firms are now receiving orders. These companies have a great opportunity to grow.
We remain optimistic about the metals, cement and real estate sectors.
These sectors are volatile and we must consider sub-sectors of real estate, such as residential versus commercial properties, which may act differently.
Investors should remain committed to India, stay invested and look at multi-cap, diverse equity funds where managers are able to fine-tune sector allocation.
If you want to increase your equity exposure we recommend spreading the investment out over 3 to 5 months depending on how much money is being added.
Why private wealth managers are still avoiding crypto
When speaking to private wealth management firms, you find that they are reluctant to include crypto into their client’s portfolios. What is your view?
We will be including crypto in our portfolios. I’ll explain.
Crypto was not legal until very recently.
Even though it is legal, some issues still arise, such as having to report any cryptocurrency gains as business revenue. This complicates things.
There isn’t a clear foundation for the value of crypto.
The supply and demand of this product cannot be accurately assessed.
Cryptocurrencies lack a framework similar to traditional currencies such as dollars or euros, which are supported by economic activity in a particular country.
It is impossible to value it, or assess its fundamentals. We are avoiding it at the moment.
Factors to consider when investing in startup companies
The ICD says that high-net-worth investors (HNIs), are investing more in private startups and markets. What do you think of this trend?
This is a trend that’s positive.
Private equity funds offer investors a way to access this opportunity, but some choose direct investment in startup companies.
Alternative investments are becoming more popular as overall wealth increases.
Investors’ risk appetite will determine whether or not this is the right move.
Investments in startups and private markets tend to carry higher risks, as well as being more concentrated.
These investments have a long gestation period, usually around 7 to 8 years. This means that your money is locked up for an extended period.
There are many factors that should be considered before deciding if private market investing is right for your family.
Alternative Investment Funds (AIFs).
Invezz – Which alternative investment options in India should investors consider, other than equities and debt?
Alternative Investment Funds (AIFs), a new class of investment fund, has grown in number.
Some AIFs, for example, invest in bonds of the B-category, which offer higher returns than traditional funds.
AIFs, which are typically designed for larger investors, can be a little riskier than most mutual funds. They may also have longer lock-in period.
AIFs are structured in a variety of ways. Some AIFs may be geared towards venture capital while others are geared toward private equity.
These categories differ greatly in terms of investment strategies and risk profiles.
Some funds are devoted to tech startups. These companies tend to be more risky than established firms like Infosys and TCS.
The diversity of alternative investment opportunities is a result.
The startup world is vast, from the early stage startups that need initial capital to those who are established and looking for growth capital.
There are more investment opportunities available across sectors and business stages.
The post Sapna Narang: Interview with Sapna Narang on Volatility and the need to increase exposure in large cap stocks, reduce exposure in small-cap and mid-cap securities may change as new information becomes available.
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