UNSHAKEN BY MACRO TURMOIL and talks around inflation and recession, our equity markets are doing well. We can expect to add 5,000 to 6,000 points to current Sensex level of 62,000. The index can top 65,000 any time. That said, we are not a cheap market in either absolute or relative terms. In absolute terms, we are at 22 times PE (price to earnings) ratio, and in relative terms, at 50-60% premium to other emerging markets. Clearly, domestic equity markets are in a fully priced situation. It is important to look at the kind of earnings growth we can achieve.

My sense is that we are good for 10-15% growth from here. If we achieve anywhere between 10% and 12% growth, we are talking about ₹825 EPS for Nifty. Next year, we can expect to reach ₹950. These numbers keep changing depending on economic outlook, oil prices and inflation. Right now, it looks like EPS will be well above ₹900 in FY24. And, hence, we are at 10-15% earnings growth. Our returns should match that.

Big Boosters

Financial services are doing well with lower costs and higher credit off-take. Next, with oil prices coming down from $100 last year to $70-78, and still falling, inflation should come down and pave the way for consumer companies to expand margins, which have been hit badly.

PSU banking is another segment that should do well. Right now, we are in one of the strongest credit cycles. If nominal GDP growth is 12%, credit should grow at least that much. This year's growth is on a lower base but even next year we can expect 10-12% growth. Also, bank books have been cleaned up. This is the period when all banks will do well. Non-banking PSUs like defence companies are also looking up. Last six months have been good for them. Among 100 or so listed PSU companies, none have created wealth in last five years. Nothing can be worse than this. The government is also giving signals that it wants to sell PSUs. It should accelerate the process. Like PSU banks, they are clean and can be sold to anybody. This is a great time to get rid of all PSU banks and invite good managements to make banking infrastructure big and competitive.

Some digital companies which have been beaten out of shape should also do well. Automotive, telecom should come back. Real estate companies should make a comeback. These are all interest rate-sensitive companies which were out of shape.

Investment Fundamentals Remain The Same!

The foremost thing is to be a good investor. Understand the difference between speculation and investing. It is almost guaranteed that you will make some money, may be not 10-12%, but 6-7-8%. You will outperform fixed income instruments if you remain invested. But if you try to earn money too quickly, you may get hurt. Keep your expectations low, about 12%, which means money doubling in six years.

Equity investors need not worry about inflation. They can do nothing about rising prices but keep investing towards their goals. In equities, in last 45 years or so, we have seen returns of 10-12%. This means 5-6% returns net of inflation. But 6% gains for a fixed income investor with 6% inflation mean no gains. This means inflation is far more damaging for conservative investors who invest in fixed income. In investing, the fixed income guy has to be really worried.

(As told to Avneet Kaur)

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