Pratik Gupta: High Market Valuations May Stifle Short-Term Gains

Indian markets are currently valued at 21 times FY25 earnings, which is one of the highest multiples in the last 20 years. This high valuation might limit short-term gains, as most of the positive factors are already reflected in the prices. Despite this, with a strong economic outlook and steady local investments, the market remains attractive for long-term investment over the next 3 to 5 years, according to Pratik Gupta, CEO and Co-Head of Kotak Institutional Equities.

Views on the Market

Gupta believes the new coalition government will bring stability and continuity in economic policies, although pushing through significant economic reforms might be more challenging. His view that the market is currently expensive remains unchanged even after the election results, leading to limited upside in the short term.

Preferred Sectors

Gupta is optimistic about banks and non-banking financial companies (NBFCs) due to their reasonable valuations and stable growth outlook. He also likes the residential real estate, hotel, and hospital sectors, expecting continued demand and supportive government policies. Although he sees potential in capital goods, defense, and infrastructure, he finds them currently overvalued.

Fiscal Deficit and Economic Growth

Gupta expects the government to achieve a lower fiscal deficit of 5% in FY25. Despite possible minor adjustments for coalition partners, strong economic growth, and high tax collections should help maintain fiscal stability. He also foresees a favorable monsoon and stable oil prices contributing to economic health.

Bond Yields and Currency

Gupta anticipates that with the U.S. Federal Reserve likely to cut rates, the Reserve Bank of India (RBI) might also lower rates in the second half of FY25. He expects the repo rate to drop by 50 basis points to 6%, with a corresponding slight decrease in 10-year bond yields. He predicts the rupee to remain stable around 83 per dollar due to strong inflows and RBI’s interventions.

Stock Valuations

Indian stocks are trading at high valuations compared to historical levels and other emerging markets, which raises concerns for Gupta. He points out that while some sectors like defense, railways, and power are overvalued, large-cap stocks generally offer better value.

Earnings Outlook

Gupta expects Nifty’s earnings to grow at a compound annual growth rate (CAGR) of 14% in FY25-26. Sectors like capital goods, cement, hospitals, metals, NBFCs, and telecom are expected to perform well, while autos, consumer staples, chemicals, and oil & gas might see weaker growth.

Investor Flows

Gupta believes that Systematic Investment Plans (SIPs) into mutual funds will continue due to the attractive post-tax returns of equity compared to debt, especially after recent tax changes. He notes that long-term economic and corporate growth prospects should support ongoing investments.

Advice to Investors

Gupta advises investors to maintain a long-term perspective, suggesting a minimum investment horizon of 3 to 5 years to weather short-term volatility. He recommends consulting with advisors to determine the right asset allocation and staying invested despite any market uncertainties.