Dalal Street Voice: We expect Indian market to provide a 15-20% return in FY23: Abhay Agarwal of Piper Serica

Abhay Agarwal, Founder, and Fund Manager, Piper Serica said that with an expected growth of 15% in corporate earnings, and assuming no geopolitical event, we can expect the Indian market to provide a 15-20% return in FY23.

The risks to this forecast are sharper than expected inflation and rate hikes by global banks including the RBI, Agarwal said in an interview with Zeebiz's Kshitij Anand. Edited excerpts:

See Zee Business Live TV Streaming Below:

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

A) It is quite incredible to see this kind of return in a year when the FPI selling was at its highest ever of $36 billion so far. This selling was offset by the domestic long-term investors who stuck to their asset allocation plan and have continued to not only hold their investment position but have also added to them.

Mutual fund flows have stayed positive throughout the year. It shows that the Indian investors have matured considerably and are not scared of volatility.

In the past, this kind of FPI selling would have led to a 20-30% crash in the market but this time the support from domestic investors made sure that not only did the market not fall but will end the year with gains.

Long-term investors are looking beyond near-term concerns and are looking for investment opportunities that are in line with the growth of the Indian economy in this decade.

Even now, the share of equity in savings is less than 5 per cent compared to 50 per cent in the real estate. So, there is still considerable room for domestic flows to improve as the investor profiles become younger.

At the same time, FPI inflows will be critical for the Nifty to provide a positive return in FY23. Global funds are continuously shunning risk and have increased their cash holdings to almost 6 per cent from 5 per cent over the last 3 months, the highest level over the last 3 years.

Only if the Ukraine situation starts to resolve itself over the next couple of months, we can expect a big inflow of FPI funds into all emerging markets including India.

The Indian markets have always traded at a premium but post the recent correction, the valuations have become more reasonable. We believe that India will get a higher share of allocations this time because of geopolitical reasons also.

With an expected growth of 15% in corporate earnings, and assuming no geopolitical event, we can expect the Indian market to provide a 15-20% return in FY23.

The risks to this forecast are sharper than expected inflation and rate hikes by global banks including the RBI.

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

A) The news from Ukraine on the war situation continues to be a mixed bag. While there is hope that the situation will not get worse and will slowly resolve itself, we are not seeing any signs of global equity funds opening up their wallets to back that hope.

The trading on MOEX has started but with very severe restrictions on the selling of stocks especially by foreign shareholders so it is not reflective of the underlying reality of sanctions.

The market has stayed sideways because investors are varied in taking very strong decisions till clarity emerges.

There is also a large set of economists that feels that the sanctions will hurt the Western countries as much as they would hurt Russia since Russia is one of the biggest suppliers of important commodities to the world.

While there is hope that the situation will not get worse from here, we need to see some solid proof of that before the global funds start allocating to risk assets.

Q) We are approaching financial year-end – which sectors are likely to be in focus in FY23 and why?

A) We believe that sectors that are direct beneficiaries of opening-up will do well, especially those that got beaten badly. We believe that investors will look for opportunities in sectors like travel and entertainment, consumer tech, EMS, and health care.

The government is now firmly focused on making India self-dependent and reducing imports as much as possible. Therefore, companies that benefit from the rollout of PLI schemes should be on the radar of investors.

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

A) Investors should be cognizant of the fact that a lot of sectors have got redefined in the last couple of years. Traditional value-creating sectors like large private banks, large generic exporters, autos, and leading FMCG companies are feeling the pressure of competition and a sharp escalation in raw material prices.

Therefore, these companies would cease to be market darlings and even long-term investors should reassess whether these companies would provide returns that are consistent with their overall return expectations from the portfolio.

At the same time, investors should look for companies that are using digital tech in an effective way to drive down costs, create better products and increase market share.

Q) In the precious metal space, we saw a 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) We have always believed that precious metals, while optically attractive as a defensive assets class, underperform compared to good quality equity portfolios over long periods of time though they may outperform in very short cycles.

With lesser and lesser demand from millennials and GenZ consumers, precious metals are no more the ultimate fear indicator. Even with this war situation and Covid before that, gold and silver prices have failed to hit their all-time highs.

The only demand for these assets, especially gold, is from the central banks who hold gold as part of their reserves in a pre-decided asset allocation plan.

Having said that there should always be a 5 to 10% allocation to precious metals in any investor’s portfolio. For ease of holding, we would always recommend a digital form since it is easy to hold and trade whenever required.

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) The biggest learning for investors has been to stick to the asset allocation plan and ignore market volatility. Investors who did not reduce their equity allocation came out on top.

Another learning has been to stay with high quality and not get tempted by beaten-down special situation stocks. Good quality companies always see their price recover the fastest.

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

A) The downgrade of the GDP forecast is not a surprise for the markets, and we believe that the current Nifty valuation has already taken into account a lower-than-expected GDP.

We expect that the earnings estimate for Nifty50 will be reduced by 8-10% for FY23 to take into account lower demand and lower margin due to higher raw material prices.

But, any further sharp reduction in GDP estimate or a sharp increase in raw material prices will be a net negative for the markets.

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) It is quite heartening to see that the investors' participation in the equity market is getting broader. We are seeing newer investors come into the market to deploy their savings and benefit from the long-term wealth creation that equity investing provides.

Indians have only 5% allocation to equity compared to 50% to real estate. We believe that this ratio will improve since the millennials and GenZ prefer to invest in equity over illiquid asset classes.

The emergence of tech-based brokers and fintech companies has also supported this trend. We believe that this trend will continue to pick up the pace and will reduce our dependence on foreign capital.

(Disclaimer: The views/suggestions/advices 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.)