Where do you see the market heading in the next 6-12 months?
We think that over the medium to long term, the movement in the equity market reflects the trend in corporate earnings.
Furthermore, we believe that the current business climate is quite favourable due to government spending, the stable forex and interest rate regime, the robust and clean banking sector, the unleveled corporate balance sheets, and the robust demographics.
Therefore, we do not think it is the end of the bull rally.
Having said that, in many segments, the market seems to be extrapolating the recent strong growth trends over the next many years creating room for disappointment in such pockets.
Markets anticipate an EPS (earnings per share) growth rate of about 18 per cent for the NSE 500 index over FY25, which we think is reasonable considering that earnings have been rising at a similar rate since Covid and we don’t see any significant changes to the top-down fundamentals that are propelling growth in India.
However, there are important domestic and international events, such as the US and Indian elections, scheduled for the next six to nine months.
As a result, we anticipate periods of high volatility and investor anxiety.
In the absence of any big negative surprise, we believe Indian markets should provide positive mid-single-digit to low double-digit returns.
How can the upcoming General Election impact our market?
We think that the current government’s policies on the development of infrastructure, the financialisation of the economy, the advancement of green technology, and its attempts to raise the manufacturing sector’s share of India’s GDP through PLI schemes have been crucial in fostering the country’s economic growth, particularly in the previous four to five years.
It goes without saying that there has been a considerable upward revision in the profit estimates of several market segments that are either directly or indirectly influenced by these measures.
The upcoming General Election will determine the continuity of such policies and therefore is significant for the market.
Also Read: Nifty 50 is up 1% this year so far; can it see a pre-election rally?
Why are we not witnessing foreign capital inflow when the Indian economy’s outlook is robust? Will the trend continue?
A number of international factors influence capital flows to the Indian market, such as expectations for global economic growth, inflation in developed markets, expectations for interest rates in major economies like the US, Japan, and the EU, India’s relative growth compared to other emerging economies, India’s relative valuations compared to other emerging economies, and any geopolitical risks.
Even if India’s economic growth is predicted to be rather robust, other major nations are still experiencing inflationary fallout from the Covid era’s loose fiscal and monetary policies.
As a result, the US Federal Reserve and the European Central Bank (ECB) have decided to maintain higher interest rates for longer, which has impeded capital flows to emerging economies such as India.
Further, within the Emerging markets, India has been gaining foreign capital flows at the cost of China, which has seen significant economic growth decline since the Covid.
However, given the attractive valuations for Chinese equities relative to India (Shanghai Composite Index PE at 14.1 times versus Nifty 50 Index PE at 22.6 times), some of the foreign capital may have also started to look at China favourably.
Also Read: Fed signals three rate cuts this year; how will it impact equities and gold? Experts weigh in
What are the pockets of opportunities at this juncture? Can we bet on rural themes?
We continue to remain positive on domestic themes, including manufacturing, which has a long runway of growth.
We believe that capex, particularly by the private sector, is set to pick up this year, and hence we are positive on sectors such as financials, industrials, cement and utilities.
Discretionary consumption remains an area of focus for us, with India’s fast-growing per capita incomes, aspirational youth and strong premiumisation trends.
We are also positive about the telecom sector, which is well consolidated and has better ARPU (average revenue per user) triggers in the long term.
While the rural sector has not shown any meaningful signs of a demand improvement, we remain cautiously optimistic about the segment as there are potential triggers on the horizon.
Specifically, we see early indicators of a possible normal monsoon this year, lower inflation across categories and better rural incomes aiding consumption.
Earnings season will start in the coming weeks. What are your expectations from Nifty companies?
After a strong show in 9MFY24 (nine months of the financial year 2024), wherein the Nifty companies posted about 26 per cent growth in profits, we expect growth to moderate in Q4FY24, albeit stay in double digits.
This is driven by moderating margins, where the benefits of a benign commodity price environment have been largely captured.
We are yet to see a meaningful rise in revenues across sectors, implying a continued weak demand environment.
While we do not expect any large surprises from companies this quarter, we also do not expect meaningful changes to future earnings estimates, with a good growth of 12-14 per cent seeming a likely scenario in FY25 and FY26.
India, however, remains a preferred investment destination for global investors as corporate profit growth is one of the fastest among emerging economies.
We may see some weakness in sectors like IT and FMCG, however, this could be offset by financials and autos.
Commentary from company management will be key this quarter, with a focus on how the macro environment is impacting demand and expectations of potential headwinds (global or domestic) that could impact the hitherto positive outlook across sectors.
Also Read: FMCG stocks see surge in foreign investment in first half of March
What is your outlook on the Indian bond market? Why should investors have bonds in their portfolios?
The domestic factors affecting the Indian bond market are looking positive.
Domestic inflation is in a comfortable zone and is being supported by a well-defined fiscal consolidation trajectory.
Oil prices have remained in a reasonable range while the rupee has also been relatively stable.
Additionally, global bond index inclusion has been driving good FPI flows to the government bond market.
However, the global factors still point to a mixed picture.
Inflation remains sticky, the global debt position remains high (versus GDP) and the geopolitical situation stays uncertain.
In this context, RBI might have to wait for much stronger cues to cut rates and might choose to follow the Fed on monetary policy easing despite positive domestic factors.
With the earnings yield gap model (EYG) pointing to bonds as a stronger return generator versus equities, we expect bonds to do well this year and recommend a higher allocation within investor portfolios.
What are your views on gold? How do you expect the yellow metal to perform in the next financial year (FY25)?
Gold has traditionally acted as a hedge against inflation.
As global inflation soared over the past two years, gold has reached record highs and has delivered a strong return of 13 per cent (in the US dollar terms) in calendar year 2023.
The returns were 21 per cent if calculated from the lows of October 2023 (price of around $1,800/oz) to December 2023 (price of around $2100/oz).
This has been due to higher global demand for gold, both from central banks and households, as well as due to expectations of interest rate cuts.
China and India are two large consuming countries, which have seen a rapid rise in their demand for the yellow metal.
There could be limited upside to gold from current levels, with some positive movement likely when the world embarks on an interest rate downcycle.
The timing may be a bit longer than expected, as rate cuts are pushed back into Q3 or Q4 of this year.
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Disclaimer: The views and recommendations above are those of the expert, not of Mint. We advise investors to check with certified experts before making any investment decisions.
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Published: 22 Mar 2024, 02:44 PM IST