In an interview with ETMarkets, Kulkarni said: “As for other asset classes, I feel gold is looking toppish, so equities should have significantly higher allocations compared to other assets” Edited excerpts:
Thanks for taking the time out. Well, after a weak October, investors are going through a volatile November. What is your take on the markets?
Let us rewind a little and see how we have been faring this fiscal year. FY24 ended pretty well, with very strong earnings. Nifty earnings grew by almost 25%. However, on that base, growth has been slightly challenging. Moreover, there have been challenges with how things have been on the ground. There were elections in the first quarter, and the monsoon in the second quarter was quite strong. Various factors, including weather and political aspects, have impacted the order flow. The first half has been slower than expected, contributing to the correction we have seen in the market.
This correction has been a result of valuations being slightly higher than expected, compounded by earnings missing expectations. When this happens, the market not only corrects for the miss in earnings and adjusted expectations but also experiences some degree of de-rating. This de-rating is playing out right now.
That said, the correction we have seen so far presents a good opportunity to start looking at investments in the market and building a portfolio again. If you already have a portfolio, this is a good juncture to add to it. It is definitely a good time to invest.
The space that is corrected the most is the small and large-cap space. Do you see more consolidation in this space?
It is difficult to say definitively, as it will be very stock-specific. However, we use one parameter—the number of stocks trading above their 200-day DMA (daily moving average) among the top 500 stocks. This has been a very decent indicator we have followed for around 20 years, and it works well over time.
Typically, on a long-term basis, the average number is around 53%. This number never stays at the average; it either overshoots or undershoots. At its peak, about 90% of stocks trade above their 200-day DMA, which typically signals that the markets are very likely to correct. For instance, at the end of July or mid-August, this number was around 85%-90%, meaning the chances of sustaining those levels were very low.
As of a couple of days ago, the number was down to 39%, and today it might be around 34%-35%. This number usually bottoms out at around 18%-20%, though that is often driven by specific events such as wars or major challenges.
In the absence of such major challenges, the risk-reward ratio has definitely improved. Among the top 500 stocks, close to 65% have corrected more than 20% from their 52-week highs. Currently, only about 2.5%-3% of the stocks are near their 52-week highs. This shows that a significant correction has already occurred.
This correction in valuations presents opportunities, as many companies are still performing very well. People, especially institutions, will eventually want to own good businesses, and money flows will follow.
What are the queries that you are getting from your clients, especially at a time when benchmark indices are down by about 10% from highs?
There are two sets of queries that we are receiving from clients. One comes from clients who are jittery, which is expected. When portfolio values drop, people tend to get anxious, and the returns also start to appear less attractive. From a six-month perspective, returns are not as appealing as they were three to four months ago. These clients are asking questions like, “What should we do? Should we change the profile? Should we hold more cash? Should we reduce exposure?”
The second set of queries comes from clients with a higher risk appetite who are considering investing. A common question we hear is, “Is this a good time to invest?” At this juncture, we are advising clients that if they have some risk appetite and capital, they should start looking at investments. This is a good time.
A couple of months ago, we were more skeptical about accepting money from investors, but now we feel confident about it. This confidence is reflected in the advice we are giving to our clients.
Which sectors are looking attractive, especially after the recent correction?
A whole host of sectors have started to look attractive, depending on how their recovery paths unfold. Sectors with faster recovery potential are the ones performing well. For instance, the capital goods space, which took a breather in the first half, should start doing better in the second half. This is due to strong order flows, high capacity utilization in the economy, and other favorable factors. Capital goods as a sector will likely recover faster than others.
Apart from that, consumer discretionary is another area expected to do well—travel, tourism, and discretionary spending are poised for improvement. The auto sector, currently facing challenges with inventory pile-ups and the typical slowdown in Q3, should start showing improvements from Q4 onwards.
Banking, as a sector, is also noteworthy. While the worst may still be getting factored in, we might see one more challenging quarter. However, Q4 and Q1 of FY26 are expected to look attractive for BFSI.
Finally, sectors like pharma, which are already performing well, should continue to do so. To summarize, the fastest recovery is likely in capital goods, followed by consumer discretionary, autos, and eventually banking. The recovery timeline will vary by sector, but the outlook is becoming increasingly positive.
What should be the current asset allocation strategy?
That is a broad area to answer, but let me put it very simply: it all depends on your risk appetite. If you genuinely ask what kind of return we can expect from equities as an asset class, I believe that from current levels, over the next year, we are set for a 15% to 16% return.
Why do I say so? Because the earnings for the benchmark Nifty were cut by a couple of percentage points after this quarter. For FY25, we are looking at earnings of around 1,070, and for FY26, around 1,220–1,230. As we move ahead, by January or February, we will have more clarity about FY26. Based on a multiple of 20, considering growth, balance sheet quality, and other factors, the fair value for the market will likely range between 24,500 to 25,000. Currently, we are seeing a discount of about 4% to 5% on that fair value.
Typically, markets deliver around 10% to 12% returns annually over the longer term, aligning with earnings growth. Adding the 4% discount to the 11% to 12% earnings growth, we could expect a return of around 15% to 16%. Including a dividend yield of around 1% to 1.5%, the potential return rises to 16% to 17%, which is quite attractive.
Yes, there may be challenges, such as missed earnings or further small cuts in the next two quarters, but even then, a 15% to 16% return looks achievable, which is quite good. From this perspective, if one currently has a higher allocation to debt, they should consider shifting more towards equities.
As for other asset classes, I feel gold is looking toppish, so equities should have significantly higher allocations compared to other assets.
FII outflows crossed Rs 1 lakh crore in October, while SIP money crossed Rs 25,000 crore in the same month. How do the flow dynamics look for Indian markets? What is weighing on FIIs – is it the valuation quotient?
From a flows perspective, we are seeing consistent inflows from investors. Many are asking whether they should invest now or wait for a couple of months. Despite this, the inflows have been steady and solid, with SIP inflows of Rs 25,000 crore being particularly noteworthy.
However, FII selling is a concern. It’s partly driven by technical factors, such as currency behavior and the global context. The China trade narrative has played out, and currency depreciation has largely occurred. I don’t foresee serious challenges here.
Typically, FII flows reduce in December as their activity slows down. Volatility also tends to decrease in the second half of the month. December should begin to look interesting from that perspective.
Overall, while FII outflows have been significant, I don’t see a massive challenge going forward. The technical trades involving currency and other regions have played out, and 2025 and FY26 should look better. The only concern could be the supply of shares from promoters and key institutional players, which is something to keep an eye on.
A lot of fund managers I spoke to in the past months are sitting on cash, with money diverted to index funds. What is your strategy?
We do have some cash in our portfolio, but it’s not a very large amount. At this point, we are focused on how we deploy that cash. Four or five months ago, it was very much a seller’s market, where the seller commanded the price. Today, it’s become a buyer’s market.
Our strategy is to deploy cash thoughtfully, focusing on stocks with strong quality and earnings visibility. We are not just looking at the asset value of a company but at how its earnings visibility will pan out.
We aim to remain focused on lower-volatility and earnings-visible stocks rather than high-beta plays. That said, if we find something at a steep discount, we wouldn’t hesitate to buy at this point in time.
What is your take on the recently listed IPOs? It seems like the market is favoring companies with a growth outlook.
As I mentioned earlier, earnings visibility is key. Companies with strong earnings visibility will perform well, and IPOs are no exception. Ultimately, stock performance must be backed by earnings. Wherever there is robust earnings visibility, those are the areas that will do well.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)