Be careful! We are already halfway through the bull run, says Jayesh Faria of Motilal Oswal

New investors should be cautious as they invest in the financial markets since we are already half-way through the bull run. And a lot of sectors and stocks are trading at a very high premium to their P/E averages, says Jayesh Faria, Director, Regional Head, West, Motilal Oswal Private Wealth in an email interview with MintGenie.

He also explains why investors should consider investing in the banking sector, consumption, industrials and healthcare.

Faria also deconstructs the reasons for investing in Nifty50 based on its valuation vis-à-vis other emerging markets (EMs).

In view of the recently hiked long term capital gains (LTCG) tax, he advises small investors to opt for mutual funds instead of investing directly.

Edited Excerpts:

What are the key sectors investors can pin their hopes on?

We continue to remain bullish on PSU Banks, Consumption, Industrials, and Real Estate, and we have turned constructive on Technology. We also remain positive on healthcare, and remain underweight on Private Banks and Energy.

Banking sector’s valuations appear attractive. In our opinion, valuations are not completely factoring in the recapitalized balance sheets of PSU Banks, decadal low net NPAs, and a robust 15-16% credit growth. With the possibility of a rate cut by the RBI delayed, NIMs may still remain stable at current levels, albeit, with a slight decline due to rising borrowing costs.

Private Banks are currently trading at an 18% discount on a forward multiple basis. The discount remains relatively consistent on a trailing and forward basis, indicating parity in historical earnings growth and future 12-month expectations.

While Metals, Telecom, and Healthcare sectors are trading at a premium on a trailing P/E basis, on forward earnings, the valuations are near their long-term averages, suggesting stronger earnings potential in the next 12 months compared to their past performances.

Financial markets have been quite volatile in the past few weeks. Going forward, should investors remain conservative or ambitious?

The Nifty-50 trades at 20.3 times its one-year forward earnings. Following the recent correction, it is fairly valued and within its 10-year forward average multiple of 20.4x. Compared to its EM peers, India has been considered relatively expensive for a long period. India enjoys its premium valuations on account of the following reasons:

A) Nifty PAT, which has compounded by 25%/18%/12% over the last 3/5/10 years.

B) A strong, continuous, and stable political setup, with the victory of PM Narendra Modi/BJP (under NDA) for the third consecutive term that provides policy continuity and reforms momentum.

C) A GDP growth rate ranging between 6% and 7% during this period.

D) Healthy macros – stable currency, twin deficits under control, peaking of interest rates, moderating inflation print, and massive development of digital and physical infrastructure.

Looking at the above-mentioned points, we feel that investors with long term horizon of 5 years plus should be ambitious and use market corrections to invest.

In the Budget 2024, LTCG tax was raised from 10 percent to 12.5 percent. Do you think it will discourage small investors from investing or redeeming their investments on a regular basis?

Small investors ideally should take the route of mutual funds for their investments and it should be with done with more than 3-5 years’ time horizon due to volatility. Hence this increase in LTCG tax should not have any impact on their investments.

They should be careful while choosing the funds at the time of investments rather than move within funds for chasing returns as that will not be lucrative with this increase in tax.

Can you suggest which mutual fund schemes are a ‘good buy’ for retail investors in the market conditions?

If Equity allocation is lower than desired levels, investors can increase allocation by implementing a staggered investments strategy over 6 months for Large & Multicap Strategies. Hence, we recommend following mutual fund schemes for retail investors with five-year time horizon: Bandhan Sterling Value fund and Helios Flexi cap Fund.

For conservative Investors – HDFC Balanced Advantage fund and ICICI Balanced Advantage fund

It is expected that the RBI will cut down repo rate towards the end of the year. What impact, if it happens, it will have on the fixed income instruments?

In our view, investor should have duration bias in the fixed income portfolio so as to capitalize on the likely softening of yields in next 1-2 years. We feel that balanced risk profile investor of his fixed income portfolio should have 30 per cent allocation in actively and passively managed debt strategies. 30 per cent – 35 per cent of the portfolio should be in Multi Asset Allocation funds & Equity Savings fund as they aim to generate enhanced return than traditional fixed income with moderate volatility.

To improve the overall portfolio yield, 30 per cent – 35 per cent can be allocated to Credit strategies, REITs/InvITs and select high yield NCDs.

Is there any investing advice that you want to give to the new investors?

New investors should be careful now while entering the markets as I feel we are half way through bull market and lot of sectors & stocks are trading at very high premium to their historical price to earnings averages.

They have to be careful while choosing their investment vehicle and the manager. Ideally, they should start with mutual funds and low exposure to equity and increase over a period of time once they are comfortable with volatility having experienced them self.