Cyclical Stocks To Outperform For Few Quarters, Says Nippon India’s Manish Gunwani
As the Indian economy recovers from the pandemic-induced disruption, cyclical stocks will continue giving good returns to its investors for another year.
That’s according to Nippon India’s chief investment officer for equity, Manish Gunwani, who said the economy is at the start of its up-cycle while the market is in the middle of the same cycle.
“I think there is a one-year horizon where the cyclicals are still quite cheap based on normalised valuation of last cycles,” he told BloombergQuint’s Niraj Shah in an interview. Cyclical stocks refer to those which rise and fall along with the country’s economic cycle. Gunwani is positive on banks, non-bank lenders, retail, multiplexes and mall-owners.
To be sure, an investor’s view on cyclicals doesn’t just depend on valuations but also on global trends, he said. “Why I’m optimistic at this time despite the markets going up a lot is that the policy now seems to be very pro-growth.”
Monetary, fiscal and even exchange rate policy “firing together at this point of time” makes the CIO more optimistic than he would be at current market levels. Indian equities and the benchmark Nifty 50 Index is at its all-time high, rising 8% in less than two months of 2021.
Nippon India expects mid-cap funds to perform well going forward as they are heavy on cyclicals. “Overall I expect cyclical stocks to outperform higher PE stocks,” he said.
PE Multiples To Come Off
As valuations for some stocks hit all-time highs, PE (price to earnings) multiples are likely to come lower once inflation creeps in, Gunwani said.
As growth comes back and the stimulus-led inflation creeps in, interest rates are likely to inch up again, he said. That will bring PE multiples lower from their current levels, he said, adding future stock gains will be led by earnings growth.
“If I were to look at at 2-3 year horizon, the Nifty or market earning growth should be around 18-25% and there should be a bit of PE compression.”
Watch the full conversation here: