“Such volatility can lead foreign investors withdrawing money from emerging markets including India. Investors should remain vigilant and diversify their portfolios to mitigate potential risks,” he says.
Edited excerpts from a chat in which he also speaks about sectors that are looking attractive.
The market has been rallying almost non-stop after the June 4 crash. How much of this is based on fundamentals and how much on retail investor-led liquidity?
The market’s rally post-June 4 crash is a mix of fundamental growth prospects and retail investor-led liquidity. The National Democratic Alliance (NDA) has formed a strong coalition government at the centre despite BJP not garnering an absolute majority on its own. We believe that economic growth may not be impacted as the new government is a strong coalition. The most reassuring message from the election is that India will continue to focus on macro-stability and the government will continue to prioritize infrastructure spending, affordable housing, reforms in all factors of production to boost manufacturing, removing supply-chain bottlenecks and creating jobs.
Over the short to medium term ie: next 1-2 years, the markets would focus on earnings delivery as there is limited upside from valuations. Retail investors continue to invest regularly providing long-term support to the markets. We believe that his combination of fundamentals and liquidity will anchor a bull-market in stocks.With such a large number of stocks trading at record high levels, how difficult is it to find stocks at reasonable valuations? Do you see a risk to the bull run from the over-exuberance seen in SME stocks, many of which are doubling on listing day itself?
Finding stocks at reasonable valuations can be challenging when markets are trading at record highs. It requires a selective approach, focusing on companies with strong fundamentals, growth potential, and reasonable valuations. The broader markets (NSE500) are expected to deliver mid-teen earnings growth with much higher growth expected from mid and small caps. We believe that valuations are fair across market caps, leaving very little room for absolute multiple expansion. So, the markets will be driven by narratives in the near-term and on earnings delivery in the long-term.
Mid and smallcaps are trading at higher absolute valuations vis a vis largecaps, and this has been the case over the past 12 months. However, it is also the case that a majority of high-growth segments in long-term structural themes (megatrends) – premium consumption, manufacturing and infrastructure are better represented in mid and small caps (SME) due to which the earnings growth outlook for SME is almost twice that of (25-30%) of the large cap universe. So, the growth-adjusted multiples (PE / Earnings Growth) for SMIDs are still not outlandish.
We need to continue to focus on quality stocks with a very careful screening of promoter integrity and past track record of corporate governance. In an exuberant market, all stocks do well and many unscrupulous companies also begin to get high valuations, only to crash sharply when the tide turns.
How do you read the sustained rally in PSU stocks after the elections? If someone is investing for the next 5 years, does it merit to invest in PSUs?
The sustained rally in PSU stocks reflects investor confidence in the government’s growth and reform agenda. However, it’s crucial to consider individual company prospects, sectoral trends, and overall portfolio balance. There is a wide range of PSU stocks and they cover the gamut of ‘value’ to ‘high-growth’ sectors. There are PSUs in energy and global commodities, banking and finance, defence, capital goods, railway, power utilities and many other segments. So we need to take a stock-by-stock call. Overall, for a 5-year investment horizon, there may be merit investing in PSUs, especially those undergoing strategic disinvestment or reforms but there are certain pockets where I do see a speculative frenzy building up and valuations do not make sense. Most of these are midcaps or small caps with limited free float as the government has divested only a small percentage of its shareholding in many names. I would be cautious in this part of the market.
What are the expectations from the Budget from a capital markets perspective?
The capital markets anticipate supportive measures from the Budget that could include tax incentives for investments, measures to enhance liquidity, and policies that encourage long-term capital inflows. The focus is likely on sustaining the growth momentum and providing a stable environment for investors. The Government will attempt to balance fiscal consolidation versus increased capital expenditures by utilizing the higher-than-expected RBI dividend. We may also see increased support for the lower income categories and agricultural sectors. Markets will focus on the Budgetary allocations towards key ministries and Governments policy focus on infrastructure, manufacturing, defence, railway, power etc.
Despite losses, F&O trading has become very popular since Covid days. How worrisome is this?
The exponential rise of F&O trading is worrisome as it indicates a high level of speculative activity among retail investors. It’s important for investors to understand the risks involved and not get carried away by the potential for high returns without considering the possibility of significant losses. Most of the trading is in same-day or 1-day expiry options on Nifty or Bank Nifty – this is mostly speculative activity. Government and regulators have already acknowledged this issue and we can expect some measures to ensure that excesses are controlled.
Which sectors do you think offer enough value even at this stage of the bull market?
Discretionary consumption, including auto and auto parts. The next five years are likely to bring a major rise in corporate capex leading to strong order books for industrial companies. New investment areas such as conventional and renewable energy, EVs, defence, railways, electronics manufacturing, and semiconductors are looking promising. The real estate sector also looks promising with growth picking up in a cyclical upturn. We are also positive on financials which cater to rising savings viz. broking, wealth and asset management, insurance etc.
While financials and IT look the most attractively valued based on absolute valuations, we also must appreciate the high-growth potential and long runway for segments like capital goods, defence, electronics manufacturing. Such high-growth and high-potential stocks may appear expensive based on near-term earnings but if one considers the long-term growth path, valuations in many cases look reasonable.
No doubt that we are all bullish on India in the long run but as far as the near term of next 1 year is concerned, what can upset this bull market?
In the near term, factors such as geopolitical tensions, changes in global monetary policies, and any domestic economic setbacks could upset the bull market. The biggest driver for global markets has been the resilience of growth, especially in the US. However this high growth has also come at the cost of higher inflation. So now the scenario is that of higher interest rates sustaining for longer – this can create stress in currencies and bond markets (e.g. Japanese Yen has begun to depreciate sharply, reaching 25-year low levels). Such volatility can lead foreign investors withdrawing money from emerging markets including India.
Investors should remain vigilant and diversify their portfolios to mitigate potential risks.
