No low-hanging fruits in this market; be ready for healthy real returns but lower nominal returns: Prashant Jain
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, CIO,, observes that the Indian market is fairly valued. He notes reduced valuation dispersion across sectors. Nominal GDP growth is around 10-12%. Profit growth should align with this. Nifty is expected to compound in low double digits. Consumer discretionary and capital spending should grow faster. Banks and utilities look relatively better. He remains underweight in consumer staples and large-cap IT.That is always the case. In equities, it is always a game of right understanding, discipline, and lots and lots of patience. In a growing economy, the more patient you are, the more wealth is created. Multiple people have said this in multiple ways, but yes, what you are saying is absolutely right.This is probably the most fairly valued market that I have seen in my entire career. Not just in aggregate terms, but even across sectors, the dispersion in valuations has really come down. Five years back, retail banks were five times price to book; corporate banks were 0.2 to half time price to book. They have converged between two, two-and-a-half times.FMCG stocks were 70-80 PE. Utilities or defence companies were 3, 4, 5, 7 PE. Both come around to 15 to 40 odd times. This is a market which has little room for multiples to move up and even across sectors the under and over valuation is the lowest I have seen. This is a classic compounding market and one more thing which has changed which all investors should take note of is that while the real growth in India continues to slowly tick up, inflation has come down really sharply.As a result, our nominal GDP growth is now growing at around 10-11%. Margins are fairly healthy across sectors. Barring isolated companies, we do not see too much room for margin improvement. At a very broad level, I feel profit growth should track nominal GDP growth around 10-12%. We saw it a few days back that even bank credit growth has slowed down to 9 odd percent and so, aligning with nominal GDP. It is growing slower.Consumer companies are growing in single digits. So, this is a market where Nifty should compound in low double digits over next 5-10 years and not much to choose across sectors. I think that 10-12% compounding is extremely valuable if you put it in the context of extremely low inflation and low cost of capital. The gap between India and US interest rates is now sub-2%. The margin is the lowest we have ever experienced. For most of my career this number used to be between 4% to 8%. And now, it is sub-2%. So, we have to be prepared for healthy real returns but sharply lower nominal returns. That is what I thought looking at these markets.As I said, some dispersion is, of course, there but it is sharply lower compared to the past. Having said that, I feel consumer discretionary and capital spending should continue to grow faster than nominal GDP. Consumer staples and IT, especially the large companies should grow much slower. But this is about growth in businesses, growth in profits. Valuations seem to be discounting most of what I say.So, the stocks outperforming just because profits are growing higher need not be the case. But I still feel on the margin, banks look a little better; utilities look a little better. The consumer discretionary looks alright to me; pharmaceuticals based on individual companies are promising. And what we are underweight on is basically consumer staples and largecap IT.You are right some themes will grow faster. Of course, I mean, Make in India is a very powerful theme. But it has been discussed for many, many years. Defence is, of course, a very powerful theme. So, these themes will definitely grow. Digital businesses is a very powerful theme. They will continue to outpace the GDP growth by a wide margin. The only challenge these themes have is that they appear to be fairly valued, and in some cases, even overvalued.For example, look at the price movement of defence companies. They are up 10x to 15x, so the multiples are not cheap, of course, growth is there. The key is that the growth is mispriced and I see very little areas where companies with a promise of faster growth are mispriced. So that is why one has to be a little cautious. There have been multiple occasions in the past when companies have done exceedingly well but stocks have done nothing over 10-20 years because the growth was overestimated and over discounted by the market. I do not think there are any low-hanging fruits in these markets.: I wish it was the case. But as I said, this is one of the most perfect markets that I have seen in my entire career – both in terms of aggregate multiples and multiples across sectors., I am sure there will be a few companies, maybe many companies, which will in the end outperform. But I am able to spot these right now.These will be individual companies which need not fit a theme. Pre-covid maybe there were three crore Demat accounts, today there are 13 or 15 crore Demat accounts. So, this has been a narrative-driven market and most of these are first-time investors and narratives. The narrative is correct and it is very logical and that is why these narratives have probably fully or over discounted. That is why I feel it will be a market where one can try and outperform the markets by individual bottom-up picks and not through theme- based investing. At least that is my view. Of course, one could be wrong and some themes may outperform significantly even from here.
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