Equity market returns to 'normalise' this fiscal year, says Canara Robeco

The returns on Indian equities will "normalise" this fiscal year in line with corporate earnings growth, the head of equities at Canara Robeco Mutual Fund said on Monday, making a case for increasing exposure to large companies.

"The 25% growth in earnings, which was witnessed in last fiscal, will normalise to around 13%-15% this year, and when that happens, there would be realignment of market expectations," Shridatta Bhandwaldar said in Mumbai.

"Overall returns from Nifty 50 would also be around the earnings growth, so this would be a moderate returns' year."

Canara Robeco Mutual Fund manages around 880 billion rupees ($10.55 billion) of Indian equities. India's financial year starts April 1.

A booming economy and strong foreign fund inflows boosted the benchmark Nifty 50 index about 29% last fiscal, its best performance in three years.

Bhandwaldar expects foreign inflows to pick up further this fiscal year, with activity peaking in the second half once the Federal Reserve starts cutting interest rates.

"Foreigners will prefer large caps but remain worried about the current valuations."

The fund manager is also looking to increase allocation to large-cap shares, as the divergence between returns on large, mid, and small caps narrows.

Small-cap stocks have risen 3% in 2024, after gaining over 55% last year, while mid caps are up 5.6%, after surging about 47% in 2023 and outperforming the 20% gains on the Nifty 50. The Nifty index is up 3.3% so far this year.

India's markets regulator has flagged froth in small- and mid-cap stocks and mandated mutual funds to conduct stress tests.

"As we move down the chain of market cap curve, the margin of safety is little less, so we have been moving towards large caps wherever there is space in portfolios," Canara Robeco's Bhandwaldar said.

This fiscal, domestic "cyclicals" should outperform the overall market, with hotels, automobile companies and airlines doing better compared with information technology, commodities or chemicals companies, the fund manager said.