How to invest Rs 50 lakh in this market to generate the highest returns in the next 2-3 years? Anil Rego of Right Horizons PMS explains

Indian equity markets are witnessing a strong rally in 2024. The Sensex has gained 15% this year and is currently trading near its all-time highs. On the other hand, the BSE Mid Cap and BSE Small Cap indices are up almost 33% in 2024. While a bull run is an ideal scenario for market investors, they are faced with several questions like where should we invest now amidst this strong rally, which sectors can we find better valuations and good returns? In a conversation with Business Today, Anil Rego, Founder and Fund Manager at Right Horizons PMS, shared his insights on the current market dynamics, the likely impact of interest rate cuts and US elections on the markets, FII investments, which sectors still look attractive, investment strategies and more. Edited excerpts:

With the stock market currently approaching record highs, where are HNIs and UHNIs investing their money now?

As growth remains resilient, we believe that GDP growth is largely in line with the long-term trend. Strong growth in India and political stability are key factors driving this rally. We believe that this growth is being driven by sustained domestic consumption, increased infrastructure spending and increased corporate profitability. Investor confidence is likely to be buoyed by the idea that a relatively stable economy focused on key structural forces will create new opportunities on the horizon. We believe that the balance between macro stability and growth confirms to investors that continued stability creates a foundation for growth. The achievement of the 25,000-point mark in the Nifty 50 index indicates that this is evidence of strong corporate earnings, stable political environment and sustained economic growth. We see HNIs and UHNIs continuing to focus on key trends by investing in growth building blocks in businesses in sectors available at reasonable valuations.

What are your expectations for foreign investors ahead of interest rate cuts and the US elections?

India is seen as a relative beneficiary, thanks to its domestic demand-led growth model, benefits from lower commodity prices, changes in supply chains and favourable foreign policy dynamics. India’s strong economic position is expected to attract more investor interest. The rate cut in September could drive more investment towards emerging markets, with India likely to benefit significantly as domestic growth is structurally driven by solid domestic consumption, increased infrastructure spending and supportive government policies. After a solid 2023, FPI inflows into Indian equities were relatively modest in H1 2024. FPI inflows are expected to pick up going forward due to the inclusion of Indian government bonds in the JP Morgan Global Bond Indices.

Public sector stocks have outperformed the market in the past year. Do you think this trend will continue in the next year or two?

Investor sentiment towards PSU stocks can fluctuate, often influenced by government policies and decisions. PSUs are near all-time highs, while their premiums to the broader market are also at all-time highs after sharp gains. Since we believe that long-term earnings growth is the likely price driver, any slowdown in earnings is likely to impact the PSU segment, especially given the re-rating that has been observed. Slowdown in credit growth is likely to have a greater impact on PSU banks, given their relatively higher leverage as well as increased credit cost risk. We believe that these valuations in PSUs will sustain the capex cycle, which needs to continue, otherwise we could see price corrections.

Which sectors still look attractive given the current bull market?

Corporate earnings for Q1 FY25 met expectations with Auto & BFSI leading the overall growth, supported by contributions from Healthcare, Real Estate, Capital Goods and Metals. We recommend focusing on key trends and investing in growth components, we are bullish on Financials, Wealth Management, Construction Materials and Manufacturing segments.

How to invest Rs 50 lakh in this market to generate great returns in the next 2-3 years?

Markets hit record highs yesterday and we believe valuations are reasonable for large and select small and mid-caps, so a staggered approach is advisable in the current market. To get the best returns over a 2-3 year period, you need to take a balanced approach, understand your risk tolerance and market conditions. We believe that high-quality companies with solid moats that can consistently grow earnings by 20% or more in a tailwind sector should do better over the next 3-4 years, provided these stocks are purchased at reasonable prices while pricing in future growth.

How can investors diversify their portfolios ahead of the US election?

India and the US have strong economic and strategic ties that are unlikely to be affected by the election results. The US also sees India as a key strategic counterweight to China. As a large economy driven largely by domestic demand, India is likely to see limited economic impact from slower US growth.

We believe India is well-positioned to manage volatility, supported by substantial foreign exchange reserves, stable growth and moderate inflation, fiscal discipline and a continued commitment to reforms. We recommend owning high-quality names in sectors with tailwinds and consistent earnings growth as these companies are likely to perform relatively better. Also, any volatility in such names can be seen as increasing exposure as valuations are likely to be reasonable.

What are your expectations for the Indian capital market and the overall economy in the near future?

GDP growth was resilient, with Q1 GDP growth at 6.7%, nominal GDP grew by 9.7% YoY in 1QFY25 compared to 8.5% YoY in 1QFY24. Growth in the domestic economy is structurally driven by solid domestic consumption, increased infrastructure spending and supportive government policies. Rural recovery is expected to be gradual from the second half of 2025, and we also expect government investment spending to pick up. Domestic interest rate cuts are expected in the last quarter of 2025, which should support growth.