‘Indian equities will deliver double-digit returns in the next 2-3 years’

What is your view on the Q2 earnings of India Inc. so far? What are your expectations on earnings upgrades/downgrades?

Q2FY24 earning season till now is in line with our expectations. As anticipated, large-cap IT services companies posted a muted Q2FY24 primarily due to challenging times from the world’s largest economies. 

The December quarter for IT companies is also considered a seasonally weak quarter because of the holidays. 

We can expect some recovery in Q4FY24 and a ramp-up of the deals they won in the previous quarters.

FMCG demand remains stable during Q2FY24, with urban demand continuing to lead and the rural markets remaining muted during the quarter. 

However, gradual recovery is likely in the sector in the upcoming quarter, especially in the rural areas, led by:

 (a) Government capital expenditure leading to job creation.

 (b) The festive season in Q3.

 (c) Increase in urban remittances.

 (d) Moderation in the inflation.

Additionally, premium categories continue to grow faster than the mass segment.

Financial heavyweights delivered robust numbers with a stable asset quality trend, while some margin pressure was visible during the quarter. 

We expect Nifty FY24 and FY25 earnings at 928 and 1,048, respectively, with growth expectations of 17 per cent and 13 per cent, respectively, as we are still in the early earnings season. So far, there have been no substantial deviations from our initial expectations. 

We will review our estimates following the conclusion of the earnings season.

What is your short-term view of the market? Should we keep our expectations low?

Short-term headwinds driven by the US 10-year yield rising above 5 per cent, geopolitical tensions, and crude breakout on the upside will keep us a bit cautious and time our entry points better. 

Furthermore, we are entering a few primary state elections in the upcoming months and the general election next year, so volatility will likely increase from the current levels in the next 12 months. 

Nonetheless, the Indian economy remains in the sweet spot of growth, which would stay the biggest driver of Indian equities moving forward. 

The improvement in the balance sheet strength of corporate India and the much-improved health of the Indian banking system is another positive attribute and a significant one as it will ensure that Indian equities will easily manage to deliver double-digit returns in the next two to three years led by double-digit earnings growth.

Based on the current scenario, we recommend investors maintain good liquidity (10-20 per cent) to use any dips in a phased manner and build a position in high-quality companies (where the earnings visibility is relatively high) with an investment horizon of 12-18 months.

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What should our strategy be for the mid and small-cap space now?

Over the past year, the broader market has significantly outperformed the benchmark index. We observed a substantial catch-up in the mid/small-cap index from the March 2023 low. 

The market has since recovered considerably, with 86 per cent of the stocks (till September 2023-end) trading above the 200-day moving average, indicating that the market is near the overbought zone. From here, the market will likely see a style and sector rotation. 

With the significant catch-up by midcaps and small-caps in the last couple of months, we believe that the margin of safety at current levels has reduced in some pockets compared to large caps. 

With this view, the broader market may see some time correction in the near term, while flows will likely shift to large caps. However, the long-term story of the overall market continues to remain attractive.

On top of it, ‘growth at a reasonable price’ looks attractive at the current juncture because of domestic play cool-off in commodity prices and inflation, and the expectation of rural recovery in the upcoming quarters.

Do you think the US Fed may hike rates from here on? When do you expect the Fed to start cutting interest rates? 

The recent US 10-year bond yield surge indicates that we may see one potential rate hike in the upcoming FOMC meeting. 

The current GDP prints from the US have all pointed to a pretty robust economy, and hence, the US 10-years could remain alleviated for extended periods than some parts of the market have been expecting. 

The second half of 2024 (H2CY24) is perhaps when we could start to see a softer bond view, but stubborn inflation and growth prints at the moment keep expectations muted.

Also Read: S&P 500 is down 10% in 3 months; should Indian investors be worried?

How could a US economic slowdown impact the Indian market? 

With the US economy nearing the peak of its rate hike cycle, we can expect one rate hike in the US market before the US Fed pauses. 

In the recent past, the market has not seen such interest rate hikes, which inherently elevates the risk of missteps. 

This action would translate into a slowdown or heightened recession in the developed market, which will impact the export-oriented growth in the domestic market. 

It will consequently pose challenges to some parts of earnings and market multiple of the domestic market.

Nonetheless, the Indian economy stands at a sweet spot of growth and remains the land of stability against the backdrop of a volatile global economy. This development would remain the biggest driver of Indian equities moving forward. 

The improvement in the balance sheet strength of corporate India and the much-improved health of the Indian banking system are other significant positive attributes as they will ensure that Indian equities will easily manage to deliver double-digit returns in the next two to three years.

Also Read: Stocks to buy this week: Tata Motors, HCL Tech, Persistent among 12 technical picks; do you own any?

Why are foreign investors selling Indian equities despite a robust economic growth outlook? For how long will it continue?

We have seen selling by FIIs in the domestic market in the last few weeks, led by a sudden surge in the US bond yields and the rise in the dollar index. However, this trend is more tactical, as any cool-off in bond yields and dollar index is a positive signal for emerging market flows. 

We think India will continue to attract a significant amount of foreign portfolio investor interest, given the potential of our domestic market, and as we continue to see considerable rotation out of China from a structural economic perspective. Yes, the recent selling is more short-term, and we expect the flows to stabilise.

Also Read: ‘Adopt wait and watch strategy, deploy funds slowly on market dips, says Seemant Shukla of JM Financial Mutual Fund

What sectors are you positive about for the next one to two years?

All major economy-linked sectors will drive the next leg of the rally in the domestic market. 

Four themes that will continue to grab attention are financialisation and digitisation, import substitution, premiumisation, and manufacturing. 

The key sectors that will be beneficiaries are BFSI, building materials, industrials and capital goods, hospitals, and automobiles.

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Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.

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Updated: 30 Oct 2023, 12:49 PM IST