Posted On Friday, Dec 22, 2023
2023 defied the consensus view of moderate equity returns given the background of rising global interest rates, limited scope for valuation expansion and elevated crude prices amid geo-political tensions. The Sensex delivered a total return of 19.1%, majorly supported by earnings growth. BSE Mid cap and BSE Small cap indices delivered returns of 44.7% and 46.7% respectively. Returns in large and mid-cap indices were majorly driven by earnings growth with flattish earnings multiple. This is indicative of the strengthening of the earnings upcycle which commenced in FY22. (Note: YTD Return figures as of Dec 15, 2023 are considered)
Private Sector Leads in New Project Announcements:
Source: CMIE; TTM (Trailing Twelve Month) figures are considered
Investors need to be selective as most sectors have seen a favourable earnings cycle along with stellar returns. The trajectory of consensus earnings estimates of a sector along with recent return profile can provide insights to identify the next set of market drivers. Two promising sectors which have delivered relatively muted returns along with a potential improvement in earnings trajectory are Banks and IT. Favourable credit cycle coupled with a revival in corporate credit offtake can drive earnings of banks. A likely soft landing in the US can trigger a faster conversion of deal wins to revenue in IT sector.
Apart from fundamental reasons, these two sectors could be major beneficiaries of a reversal in FPI flows.
IT and Banks: Muted Earnings Expectation and reasonable valuation
Source: Bloomberg; Data as of Dec 14, 2023
As indicated in the below graph, small and mid-cap stocks have recorded relatively better returns compared to their earnings growth. Apart from normalisation in earnings, higher flows into these categories have contributed to the superior returns in the segment. Cumulative share of flows into small and mid-cap categories over the past 3 years stands at 28.3% Vs AUM share of 19% (Source: AMFI, Data as of Nov-23). On the back of relatively lower historic returns compared to earnings growth, large caps appear favourable on a risk-reward basis.
Median Return and EPS CAGR across market cap categories:
Source: Bloomberg; Data as of 30-Nov-2023
Note:
Notwithstanding the above average valuations, the favourable earnings cycle and policy stability makes us positive on equities over the medium term. The reasonable earnings growth in the medium term could make valuations seem rational over time. Domestic economy is in fine fettle while global economy could stabilise as interest rates start their downward journey. Unlike prior election years, the base case of policy continuity could limit the volatility around election period. While the current setting doesn’t indicate chances of a material correction, staggered investment may be considered for fresh investments to benefit from any near-term volatility.
Data source: Bloomberg
Disclaimer, Statutory Details & Risk Factors:The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Mutual fund investments are subject to market risks read all scheme related documents carefully. |
Posted On Friday, Apr 05, 2024
S&P BSE Sensex grew by 1.59% in the month of March 2024. S&P BSE Midcap Index increased by 0.01% & S&P BSE Small cap Index declined by -4.8% respectively.
Read MorePosted On Wednesday, Mar 06, 2024
S&P BSE Sensex advanced by 1.2% in the month of February. S&P BSE Midcap Index advanced by 1.7% & S&P BSE Small cap Index declined by 1%.
Read MorePosted On Tuesday, Feb 06, 2024
S&P BSE Sensex declined by -0.6% in the month of January.
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