Indian equity markets may find it difficult to deliver double-digit returns at the index level over the next few years as global interest rates remain elevated, crude oil prices face upside risks and domestic household debt weighs on consumption, according to Saurabh Mukherjea, founder and chief investment officer at Marcellus Investment Managers.
In an interview with Zee Business Managing Editor Anil Singhvi, Mukherjea said the global environment has remained difficult over the past one-and-a-half years and could become more challenging as interest rates rise further.
He expects the US Federal Reserve to raise interest rates twice more between now and Christmas. He also said the Reserve Bank of India (RBI) may need to raise rates multiple times.
“If the Gulf situation does not get resolved, oil and gas prices could rise during the winter months,” Mukherjea said. He added that food grains and edible oil prices could also remain elevated due to El Nino and global warming-related factors.
According to Mukherjea, this could create an environment of high inflation, high interest rates and pressure on economic growth.
Quality stocks could provide support
In such an environment, Mukherjea expects large-cap quality stocks to provide support to investors in both India and western markets.
He said his experience of Indian markets over 10-year cycles suggests that three to four years of strong market performance are generally followed by a six-to-seven-year phase in which the broader market may not move significantly, while quality companies can continue to generate returns.
“We are in the middle of that six-to-seven-year phase where quality can earn for you,” Mukherjea said.
However, he expects overall gains in the broader market to remain limited.
“At the overall index level, at the Nifty and Sensex level, double-digit returns look difficult from now over the next few years,” he said.
Three concerns for Indian markets
Mukherjea highlighted higher interest rates, elevated household debt and weakness in white-collar employment as key concerns for the Indian economy.
He expects the probability of multiple rate hikes in India over the next one-and-a-half years to remain high. At the same time, household debt has risen significantly, particularly after the Covid-19 pandemic.
As interest rates rise, higher borrowing costs could translate into increased equated monthly instalments (EMIs) for households, he said.
The second concern is the shortage of white-collar jobs. Mukherjea said he has not seen such a significant shortage of white-collar employment since 1991 and expects the situation to remain challenging as the impact of artificial intelligence grows.
The third issue relates to household spending.
Mukherjea said governments, irrespective of political party, have increasingly focused on direct benefit transfers for lower-income households, while spending on public services such as healthcare, education and law and order has declined.
He argued that this can increase expenses for middle-class households on education and healthcare, leaving them with less disposable income for everyday consumption.
For investors, however, he said this trend has created opportunities in sectors such as hospitals, diagnostics and medical insurance.
IPO, QIP supply likely to remain high
Mukherjea also expects equity supply through initial public offerings (IPOs), qualified institutional placements (QIPs) and offers for sale (OFS) to remain high.
He attributed this partly to elevated valuations in the small- and mid-cap segments.
According to him, when companies can access the market at valuations of 30-50 times, more businesses are likely to consider going public.
“This is why I get a little worried about valuations in the small and mid-cap space,” he said.
Mukherjea pointed out that the market-cap share of small and mid-cap companies has increased substantially over the past two to three decades, even though their share of total corporate profits has not risen proportionately.
He said as long as valuations remain elevated in the segment, the supply of stocks is likely to continue.
Foreign investor flows and LTCG
Mukherjea identified potential changes to the long-term capital gains tax (LTCG) framework for foreign investors as a possible catalyst for Indian markets.
He said India currently earns tax revenue from LTCG charged to foreign investors, but the resulting foreign exchange outflows are much larger.
According to Mukherjea, foreign investors he speaks with consider the 12.5 per cent LTCG tax an important issue when evaluating investments in India.
He said any indication from the government that it is considering relief on LTCG for foreign investors could improve the prospects for foreign capital flows into Indian equities.
Mukherjea also said India remains an important large market for global investors, but tax considerations are among the factors influencing their investment decisions.
