Returns from equities likely to be lower in FY22, say market experts

Investors could hunt for picks in sectors that will benefit from the government’s capex cycle and IT services.

Despite the Sensex’s 74 per cent run-up over the past year, the Indian equity market could still reward investors if the expected revival in earnings materialises, according to market experts.

Returns during the coming year are more likely to be in line with longer-term trends (the Sensex’s five-year return is around 14 per cent).

Several factors are expected to aid the market’s performance this year.

“Moderate interest rates should aid demand recovery. Factors like production linked incentive (PLI) schemes, high government capex, and recovery in a sector like real estate that has vast linkages are expected to support earnings recovery,” says Shailesh Bhan, deputy chief investment officer-equity investments, Nippon India Mutual Fund.

“We are positive on themes like domestic consumption, pharma, chemicals, auto ancillaries, capital goods, defence production, and select public-sector names where valuations are attractive,” says Ankit Jain, fund manager, Mirae Asset Investment Managers.

Investors could also hunt for picks in sectors that will benefit from the government’s capex cycle and IT services.

There could be some consolidation, which could produce intermittent volatility.

The large-cap segment, which contributes around 75 per cent of market cap, is expected to continue benefiting from the shift in market share from the unorganised to the organised sector and the consolidation among larger businesses in various sectors, which could result in enhanced pricing power and profitability.

Longer-duration funds

Investors with moderate or low risk appetite should invest according to their investment horizon.

Those with a three-month horizon should invest in liquid funds while those with six months to one year may go for ultra-short or low duration funds.

Those who have a higher risk appetite, and an investment horizon of more than three years, may invest in longer-duration funds like gilt funds.

The yield curve is steep.

“The spread is quite high and that will offer protection in case of a rise in yields,” says Dwijendra Srivastava, chief investment officer-fixed income, Sundaram Mutual Fund.

Gold

Yields in the US are normalising from very low levels.

Flows into the US have led to appreciation of the US dollar.

Both these factors have contributed to a steep correction in the price of gold.

Investors who don’t have at least a 10-15 per cent allocation to gold should use the current correction to build their allocation.

Real estate

With developers adopting a more rational attitude towards new projects, the inventory overhang is normalising.

According to experts, the residential real estate market may have bottomed out, and one can expect moderate price rise this financial year.

With tighter regulations since 2015 onwards, speculative activities have nearly vanished.

“At least 80 per cent of the market today consists end-users and only 20 per cent is investors.

"Hence, growth is likely to be more steady,” says Santhosh Kumar, vice chairman, Anarock Property Consultants.

Those who invest in residential real estate now will have to do so with at least a five-year, or higher, time horizon to earn returns of approximately 8-10 per cent from an investment, says Kumar.

Photograph: Arko Dutta/Reuters