Pradeep Gupta, Co-Founder & Vice Chairman, Anand Rathi Group thinks that the fundamentals of financials and pharma sectors would positively surprise the market in FY23 and there is relative value in these segments.

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With over two decades of rich experience in financial markets, Gupta has played a pivotal role in laying the foundation of the Institutional Broking and Investment Services arm of the group.

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In an interview with Zeebiz's Kshitij Anand, Gupta said the equity market can be considerably volatile in a relatively short period of time, and we always suggest our clients to invest in the equity market with at least one year view and preferably with a three-year investment horizon. Edited excerpts:

Q) The Nifty50 closed FY22 on a strong note with double-digit gains. How do you sum up FY22 and what are your expectations for FY23?

A) Nifty50 delivered an absolute return of 17.5% in the FY21-22. Both Indian and global equity markets registered strong rallies between April 2020 and October 2021, since then markets have been volatile without indicating a particular direction.

Deterioration of the macroeconomic situation, particularly the spike in inflation across the world, expectation of aggressive policy rate hikes by the central banks, and geopolitical uncertainties have been the main factors behind the volatility and correction in the equity markets over the last few months.

Since most of these risks are still persisting, possibilities of further short-term correction and volatility in the global equity markets cannot be ruled out.

At any case, since the equity market can be considerably volatile in a relatively short period of time, we always suggest our clients to invest in the equity market with at least one year view and preferably with a three-year investment horizon.

Investors with 3 to 6 months investment horizon need to be aware of the considerable risk of such investment.

Q) At a time when leaders are discussing tougher action against Russia, markets have remained relatively stable. Trading on Russian bourses also started. Do you think the worst is factored in by equity markets?

A) While there are many theoretical reasons to expect that higher inflation and rising interest rate to impact equity markets negatively, in real life, the impacts of these on equity markets are rather muted, especially over the medium-term.

Therefore, unless the high inflation in the OECD countries persists for much longer than expected, we expect the actual monetary tightening in those countries to be much lower than what the consensus is currently factoring in.

In that sense, while there can be significant near-term volatility of the equity market due to higher inflation and the start of monetary tightening in the US, these are unlikely to materially change the course of corporate earnings or the trajectory of equity market over the next 1-3 years.

Much of the impact of these developments seems to be already in price both in the bond and equity markets.

A full-fledged war in Europe can have a significant negative impact on financial markets. That said, the probability of such an event is rather low at this point in time.

Moreover, historically war generally exerted a positive influence on the equity market over a longer period of time.

Q) Which sectors are likely to be in focus in FY23 and why?

A) Our major conviction calls include positive stances on financials (especially large private banks) and pharma and a negative view on frontline IT.

We think the fundamentals of financials and pharma would positively surprise the market and there is relative value in these segments.

In large-cap IT, while we like the business models, we think the current estimates factor in the blue-sky scenario, which might not fully play out. At the same time, we think that the large-cap IT valuations can come under pressure.

Q) Anything which investors should do differently in the new financial year?

A) I believe that investors should consider their asset allocation strategy and it must be in accordance with factors such as risk appetite, return expectation, investment horizon, and, expected fund in/outflow for that particular investor.

This is the key to a successful portfolio strategy. Once this asset allocation is decided by the investor by an informed, data-driven and balanced methodology, until and unless there is an extremely compelling reason, investors should not tinker with such allocation.

This, however, does not mean the portfolio should not be rebalanced periodically.

For example, since equities have seriously outperformed all other asset classes in 2020 and 2021, the effective share of equity in the portfolio may have gone well above the planned allocation if the investor was already following actual asset allocation in line with the desired allocation.

In such a situation, if the gaps between the actual and strategically planned allocations are considerable, the investors should consider bridging such gaps.

It is important that portfolio strategy is driven by long-term goals and objectives rather than shorter term market movements and sentiments.

In our analysis and assessment, this is the best portfolio strategy over the longer-term and we would recommend the same for 2022 as well.

Q) In the precious metal space, we saw 17% rally in Gold, and over 70% upside seen in Silver. What is your view on precious metal space in the new year? How should investors go about investing – digital or physical route?

A) Once again, I will desist from giving any short-term recommendations regarding these. We maintain a positive outlook, our preference is towards digital and maintaining only about 5% allocation to the metal as a total part of the investment portfolio.

Q) At Zeebiz we celebrated March 24 as Wealth creation day as it was a day when the Nifty50 made a bottom in 2020 and since then it has been a wealth creation opportunity for investors. What were your key learnings?

A) As discussed earlier, I believe that the key to long-term consistent returns is following one’s asset allocation strategy and sticking to it with regular portfolio rebalancing.

Currently, Nifty 50 companies are maintaining over 100% earnings growth over the trailing 12 months. As of now, we are pencilling in earnings per share of ₹880 for March 2023 ₹1020 for March 2024.

Q) Some global rating agencies have downgraded the GDP forecast for India – will that impact markets and earnings trajectory? What are your views?

A) As discussed earlier, we are positive on the long-term fundamentals and continue to remain positive in Indian equities.

Q) BSE has now 10 cr registered investors on the website – what does it say about the investment climate which has evolved over the past 2 years?

A) Yes absolutely, the share of retail investors in cash turnover surged to 45% in FY21 and is showing a similar trend in FY22. According to the Economic Survey, individual investors now account for ~44.7% of the equity cash segment.

The digital transformation of India has rubbed off on the BFSI sector, with them leveraging the technology for process automation and improvement in ease of transactions online to enhance customer connect.

New-generation finance companies are leveraging partnership networks across the value chain of lead generation, client on-boarding, acquisition and retention, credit/loan disbursement, and much more than ever before.

Firms now assess individual consumer insights and create alternative advisory models using artificial intelligence (AI), machine learning (ML), and big data analysis, which helps in giving its customers customised services and offerings basis their needs and requirements.

As the major players in these industries conduct tests to discover innovative use cases and opportunities, we’ll begin to see more AI/ML-based solutions for transparent, accessible, and reliable financial transactions.

This is a space we need to keep a close eye on as it is expected to change the way the way and parameters on which we do business in the capital market space.

(Disclaimer: The views/suggestions/advice expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)