Sensex could trade at 50K if earnings grow by 15% CAGR in next 3 years

Assuming that earnings can grow at 15 percent CAGR over the next 3 years the indices can trade at such levels accounting for earnings growth and further expansion in multiples, Sahil Kapoor, Chief Market Strategist, Edelweiss Broking, said in an exclusive interview with Kshitij Anand of Moneycontrol.com.

Q) The benchmark indices seem to be losing momentum, but mid and smallcaps are hitting record highs on a daily basis. What are your views on small and midcap space?

A) There seems to be some overheating in pockets but there are abundant opportunities as well. A number of small and midcap stocks have seen a surge in valuations. However, we believe that the growth pick-up in the economy has generated sufficient earnings visibility for these smaller companies.

Most of the investors who have not participated are looking at opportunities to enter these companies. We believe that in bull markets expensive stocks remain expensive and quality always has a higher price.

Q) What is your call on Sensex, Nifty for the next 2-3 years? Do you think we have a strong case to hit half a century (50,000) by the year 2020?

A) We believe that the trend for the next 3 years is upwards. For the last three year the frontline Nifty index has seen hardly any earnings growth. In the last 18 months we have seen PE expansion for Nifty largely on back of lower interest rates and a pick-up in nominal growth.

We believe that the next leg of the bull market will be driven by earnings growth as PE expansion based solely on the above to factors is approaching its fag end. Given that there could be a significant revival in the economy and the earnings cycle we could see significant upside.

Assuming that earnings can grow at 15% CAGR over the next 3 years the indices can trade at such levels accounting for earnings growth and further expansion in multiples.

Q) What are you recommending to your clients? Hold on to cash, book partial profits, buy now or just cash out? And, why

A) We turned bullish on the markets way back when Nifty was trading close to 7500 levels. We have maintained a positive stance and have been advising clients to remain invested.

When you invest with the horizon which is targeted towards wealth creation then pick up high-quality stocks and giving them ample time is the key. We are currently advising clients to stay invested but to review their portfolios for any black sheep.

For the short-term gyrations and uncertain events, we advise clients to activity use options position to ride out volatile corrections and use these phases to take advantage.

Q) Which sector(s) is on your shopping list? Are there any contra buys?

A) Infrastructure, dairy, auto ancillary and NBFCs continues to be our preferred sectors of investment. We believe select opportunities in pharma are becoming interesting and few of our picks in that space have performed well.

Q) Are there any specific risks which the market could come face to face in the year 2017 which could put brakes on the rally?

A) We believe US Fed’s policy response on unwinding its balance sheet could be a source of risk. Plunging oil prices and German elections could also pose risk to global markets and thus Indian markets as well.

Q) What is your one advise to investors inspired from your guru?

A) Investing is a serious business. Treat it with utmost commitment and vigor.