Nifty-50 at 14683 : Treading the tightrope

Every attempt to predict is an attempt to eliminate surprises, which points, inevitably, to the lack of preparedness to face uncertainties !!! 

It’s always a tough job to predict, and we are always shy of doing that. However, decision making under uncertainties is at the core of our practice. So, we make an attempt here, to set your expectations right and enable you to take decisions with minimum cognitive expenditure. In our previous note(refer Nifty-50 at 14347), we highlighted the different elements of “Macros”, ‘Valuation” and “momentum” that would impact your portfolio. Nothing much has changed since then, barring our perspective on global liquidity. The interest rate risk is “real” and it has played out to some extent in the last quarter. Incidentally it has made fixed income investments(in certain maturity spots)a little more attractive, than it was a few months back. But, it poses a much larger risk to growth assets, that have remained expensive for some time now. Quantitative easing(widening deficits) serves its purpose, so long as it leads to capital formation for future growth. On the contrary, its now being directed towards facilitating citizens to pay their bills. This is bound to create inflationary pressure, and bond markets worldwide have reacted to this concern. The tremors of that have been felt in asset prices as well. 

With that and the current valuation of domestic equity markets in backdrop, we recommend investors to wait for suitable opportunities, before deploying into risk assets. Under the assumption of robust economic growth(Nominal GDP growth of 13% (8% real growth+5% inflation) ) over the next 5 years, a high single digit (8%-9% CAGR) nominal return from equity markets would be an optimistic expectation, from current market levels (NIFTY PE of 33 and earnings of 443- revised 1st April, 2021). Any meaningful correction in the near term will improve the outcome significantly. Patience therefore, will reap dividends. 

Opportunities do exist in pro-cyclical assets, that tend to do well during economic revival. Specific opportunities in the commercial real estate space may therefore be looked at, seriously. Considering the resurgence of COVID, the price levels here(in comparison to assets value), may pose a good opportunity for long term investors.

Looking back at the last financial year, we would submit that the equity markets have given us a phenomenal opportunity to cover our mistakes and washed away the sins of the past. It is therefore sensible to acknowledge the element of luck and ensure that we do not repeat the same mistakes now and in future.

* The above note is a commentary by the author and should not be misconstrued as investment advice