Time has come to temper expectations on stock investment returns; past no crystal ball for future returns, say experts

While the returns ahead might still be solid, they probably won’t match the high-flying levels seen before, experts said. Shweta Rajani, head of mutual funds at Anand Rathi Wealth, anticipates returns of 11%-12% from the Nifty 50, while mid- and small-cap indices could offer 13%-15%.

“Additionally, considering the economy is expected to grow at a nominal rate of 10-11%, equity markets are likely to align with this growth, suggesting that investors should temper their expectations to an 11-13% return from Indian equities,” Rajani said.

The Nifty 50’s returns over the past year have been the highest since the 51% gain from November 3, 2020, to November 3, 2021, according to data from Capitalmarket. However, record outflows by foreign institutional investors in October due to a shift to equities in China, weak corporate earnings and premium valuations have started to curb those gains.

Nilesh Shah, managing director at Kotak Mahindra AMC, told Mint recently that replicating the returns of the past five years will be challenging over the next five years.

“Therefore, it’s essential to moderate our return expectations,” Shah said.

According to Aamar Deo Singh, senior vice president for research at Angel One, overall, the Indian markets have outperformed many global markets in recent years. However, after lacklustre corporate earnings and record sales of about ₹1 trillion by foreign investors in October alone, there’s been a drop of 20%-50% in the markets and stocks across most sectors.

“So, investors should look at moderating their expectations for the next couple of quarters, till corporate earnings bounce back,” he said.

Corporate earnings

Analysts indicated modest expectations for overall corporate earnings, with revenue slowing across sectors. The aggregate revenue of 1,023 companies has risen 9% but their net profit has fallen 2.7%.

Falling short of revenue and margin targets could also lead to earnings downgrades. Some analysts suggested that while the market has priced in many expectations, the potential downsides have not been fully accounted for.

The benchmark index Nifty has grown at a compounded annual rate of about 16% over the past two decades and the gains of the past year are an exception, Singh remarked.

“From a long-term perspective, India’s growth story remains intact, so investors should look at investing from a buying in an SIP (systematic investment plan) mode, focusing primarily on quality stocks,” Singh said.

Over the course of the pandemic and after (FY19-24), India Inc generated 18% incremental return on cash invested (I-CRoIC) with just 10% topline CAGR, as per a report by Nuvama Wealth Management dated 22 October.

“Can this sustain? We doubt,” Nuvama said.

Moreover, high valuations make rewards unattractive while raising growth expectations. The Nifty 50’s current price-to-earnings ratio is 23.74 times, which is almost on par with its five-year average of 24.74.

“Investors should brace for lower I-CRoIC (and market returns?) with rolling churn of themes,” Nuvama added in the report. The company said a good capital allocation strategy should generate 15%-plus incremental return on cash invested.

At the index level, Saurabh Mukherjea, founder and chief investment officer at Marcellus Investment Managers, expects returns in the low teens while the economy faces a cyclical downturn.

“However, for high-quality companies with mid-teen earnings growth and potential re-rating, there’s a good chance of achieving high-teen returns,” Mukherjea said.

The Nifty 50 is currently 7.51% lower than its all-time high, while the Sensex is 7.22% below its peak. The headline indices reached record highs on 27 September, with the Nifty hitting an intraday peak of 26,277.36 points and the Sensex reaching 85,978.25.

The Nifty Midcap 100 and Nifty Smallcap 250 hit record intraday highs on 24 September, reaching 60,925.95 and 18,688.30 points, respectively. The Midcap 100 is now 7.27% off its peak, while the Smallcap 250 is down 4%.

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