A lot of pain seems to be behind us and the market prices are reflecting that. FIIs have turned buyers consistently for the last four trading sessions. Yes, crude is again volatile, but looking at the price action, the fact that we are back at 17,600, does not seem to be bad going.
We have been cautious on the market for the last 10-12 months and we believe that the market had peaked in September 2021. In almost 18 months, markets have given no returns and if you adjust for the earnings growth during this period, which was about 16-17% and on dollar terms, markets have corrected 16-20% on a relative basis, So, the next six months will be a very exciting time.
We believe that from here on, valuations have started to look a lot more reasonable. A lot of froth from the broader market is out and the next six months will give us a great opportunity to start increasing the equity allocation. Always remember that there are certain milestones if you go into the history, which we have been watching out before the market bottoms out.
History suggests that there is always one credit event. We saw that happening last month where four banks, three in the US and one in Europe going down and that was an important one. The second milestone we normally track is that markets do not bottom out before earnings down the cycle of 10 to 15%.
In Nifty this time, we have seen about 5 to 6% earnings downgrade already. Our sense is that in the next two, three quarters probably markets would build in estimates which will be lower than where the current estimates is for the broader market earnings as well as Nifty earnings. And the third point is that normally we have seen market cap to GDP bottoming at about 65, 70 or 75% and today we are at 90%. In the next six months, looking at the uncertainty, if we reach these milestones, markets would give us a great opportunity to increase equity allocations.
So our tone of cautiousness has started to reduce and we believe the next six months should be used as an opportunity to increase your equity allocation and expect returns in 2024 and 2025.
You have always been known for spotting stocks and sectors that have corrected a lot. They are in a neglected zone and within them, you probably choose the first two leaders. So, the approach continues to be the same. Stick with companies that have larger market share in the sector and which sectors have been neglected. Is that the approach that you continue to follow?
Absolutely. The next six to eight months will be a great time from a bottom-up stock picking because the contours of broader macro construct is very strong and I believe that many companies from here on over the next five to ten years will become very big in size, provided we pick up the companies carefully.
Manufacturing is one area where we have been positive and we believe that it is a multi-year growth story and the kind of changes we are seeing at the ground level makes us believe that many of the winners of the next cycle will be from this space.
Also, financials continue to do well. We are on positive on selected NBFCs and private sector banks.
The third sector where we are incrementally evaluating is where almost four to five years of price as well as time correction have happened and valuations have started to turn attractive. It is pharma. We believe that there are many good quality companies with strong balance sheets and cash flows there and we are evaluating pharma as an incremental investment space.
Also we believe that in cement, incrementally things have started to turn positive. The cost pressures have started to ease and the outlook on profitability has started to improve. And this is one sector where in the next couple of quarters, we could see earnings being revised upwards rather than downwards.
I think these are the four, five places where we are trying to hunt for the best of the companies and from a bottom-up stock picking approach.
In the previous cycle, you were very bullish on banks and NBFCs. Of course, NBFCs did quite well till the IL&FS issue happened. This time around, you believe NBFCs can do well. Some of the names are really beaten down.
In this space, there is a distinction between good and bad. Clearly consolidation has happened in this space. There are very high quality NBFCs, maybe around four or five of them. Some of them are part of our portfolio also. We believe that the consolidation has played out quite well. The strong players are now existing and they will continue to grow over the next three, five years.
There are some mono-line businesses in this sector. For example, vehicle financing, rural financing, commercial vehicle financing. Some of the NBFCs are in a very good spot and valuations are also corrected. It is a great time because the interest rate cycle is looking to peak out in the next three to six months. Some of these wholesale funded NBFCs will be beneficial once we start to see the interest rate cycle coming down.
