We seem to have run out of positive triggers. What can give a boost to our market now?
We will be in the run-up to the elections in the coming weeks, but that too, at some level, has been taken into cognizance by the market.
The market’s strength can be partly attributed to the possibility of a good outcome for the existing current government in the elections.
We are also behind the results season now. We will get into a stage where, from an earnings perspective, it will be more like business as usual.
We don’t have any great events lined up.
There could be a bit of an issue in terms of new policy announcements as well, given that you will get into this election code of conduct too.
However, there is one area that the market will probably look forward to in the coming weeks- the initial assessment of the monsoon in 2024.
And that’s something that will be quite important from the point of view of inflation or overall consumption strength, the recovery at the bottom end of the income pyramid, and rural recovery.
So quite a lot of people will be guided by the outlook on the monsoon.
The other thing that we may now incrementally witness is any global developments from year on.
Once again, we will be back to how the dynamics of inflation and interest rates are likely to move globally.
Data points from a global economic growth perspective, especially in the US with regard to their growth as well as to their typical data regarding inflation, will be relevant because the market is quite expectant of the possibility of interest rate cuts in the second half of this year, hence, we will require constant monitoring of that event.
That will not necessarily be a trigger, but it will be the area the market will focus on in terms of new developments.
And besides that, it will essentially be more like business as usual, monitoring geopolitical situations one way or another.
If geopolitical tensions rise from here, then it is negative, and if geopolitical tensions ease, then it is positive for the market.
From a corporate perspective, there is not going to be much new coming out until we get into the end of April or mid-April when the quarterly results for the March quarter start to come about.
It is going to be a period of low triggers in the market—not much in terms of actionable events to look forward to, except for policy rates at a global level, the monsoon development, and the election results from a domestic standpoint.
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Is it time to bet on growth stocks now while the market is witnessing strong volatility?
By growth stocks, if you mean companies that are probably going to be more secular-oriented and where they witnessed relatively fewer or shallower cycles and are not necessarily as much influenced by the investment cycle or the interest rate cycle, probably yes.
That can be the situation, particularly in the background of a possibility of interest rates coming off or inflation coming off during 2024.
This is because the growth stocks get positively influenced by a lower interest rate regime.
As you know, many of these growth entities suffered quite significantly during 2022 when the interest rate curve was rising.
As a corollary event, interest rates start to kind of come off, or they should be natural beneficiaries, but it may not necessarily be something that will be across the board.
All growth-oriented stocks may not do well.
One will still have to superimpose the growth characteristics of the different segments.
If growth stocks like FMCG, consumer discretionary, technology, and a few other pockets of the market do well, then some of these may do well.
Some may not necessarily do well, depending upon the conditions surrounding them.
Conditions for IT companies could be different from conditions for consumer discretionary, and these could be different from conditions concerning FMCGs.
It is going to be quite diverse. I don’t think every growth stock will receive the same treatment in the market irrespective of everything else.
The overall environment can probably get a little more conducive for growth-oriented stocks, particularly if you get a reasonably decent monsoon because then the consumption theme in India starts to make a reversal and makes a comeback and many of the growth stocks are part of the consumption theme.
What is your assessment of the Q3 earnings of Indian corporates? What are some remarkable upgrades and downgrades?
As usual, the results season has been in line with or somewhat marginally better than expectations.
However, at an aggregate level, there has been a certain amount of upgrade overall, like the Nifty earnings have gone up by about half to 1 per cent. Nothing very material.
When we look at the broader market, it looks like, on an aggregate basis, there are more misses than hits in terms of the number of corporations that have been able to meet or beat expectations.
The extent of the hits or the companies that have been able to do better than expectations, their value has been higher compared to the value of the corporate misses.
Therefore, in terms of the count of companies, more companies have disappointed than those that have met estimates.
But in terms of value, the ones that have met estimates, their value is higher than those of the companies that have missed estimates.
In terms of value, there is an increase, and that is why, at the aggregate level, the earning estimate has gone up.
Despite that, it is not of a very significant order. To me, quite likely, it looks like we are not in a situation where we will have significant upgrades coming in the subsequent quarters as well, unless we have some dramatic change in the global economic outlook as a result of which, for example, tech companies start to contribute very significantly, tech numbers start going up meaningfully, or commodity prices firm up dramatically.
Those are the things that can probably lead to a situation where we might see numbers upgrade, but otherwise, that will be a slow upgrade to numbers.
The upgrade cycle of the market is going to be okay, but not something that will be dramatically strong.
But at the same time, it will not be detracting or taking away anything either. That’s how I see the current earning season in terms of sectors that have probably done well.
Some of the cyclical sectors, like autos, some of the banks, and a few industrials, have done pretty well.
Some of the hits to earnings or those companies that have done well have come from those sectors, while you’ll see a little bit of disappointment in a few others.
Out of consumption, we have seen a few more misses.
We have seen misses in some of the areas, like chemicals, etc. But there are some companies in the oil and gas space, for example, that have done pretty well.
PSUs have, in general, been a very hot space in the market. By and large, we have not seen great earnings except from a few companies.
The earnings of PSU companies are not matched up to the kind of euphoria that we have witnessed in their stock performances.
And therefore, to that extent, it is a little disappointing, but this is still a one-quarter phenomenon.
We may have to observe this over the next few quarters to discern a trend.
Companies in the pharma and healthcare space have done pretty well.
Banks and financial services have done quite well. Within banks, the public sector banks continue to deliver a little more robustly compared to the privates, but the expectation would be that going forward, the performances of both private and public sector banks should be somewhat similar in FY25 compared to what it has been in FY24.
In my opinion, these are some of the key observations as far as the recent results season is concerned.
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Can we say that the rally in the PSU space is overdone? Some of the stocks in the PSU space have surged over 100 per cent.
As we all know, the PSU segment is exceedingly strong. However, when we look at the delivery of earnings in this quarter, it has not been uniformly strong; it has been strong only in some pockets, whereas in many other pockets, there has been a strain, particularly in the delivery of the top lines of these companies.
The revenue growth has not been as strong. Now we have to also caveat this because how many of these businesses are more project-driven and order-driven?
There could be leads and lags, and a quarter may not necessarily be a very strong representative.
We will have to watch this trend over a few quarters to be able to judge.
What becomes important is that with these strong performances of the stocks in this space, it is now imperative for all companies in this sector to also match up in terms of their earnings delivery and growth delivery.
The Budget has reinforced the government’s commitment to the investment cycle, and they have budgeted another 10–11 per cent over and above last year for the next fiscal year, FY25.
In terms of overall budgetary spending for capital expenditure, however, we also need to be mindful that the government is very committed to the fiscal path going forward into FY25 and FY26.
Incrementally, we cannot be too optimistic about their ability to drive capital spending up to a very high level. Even next year, it is quite possible that the growth in capex might moderate.
PSU is typically the largest beneficiary of government spending. Therefore, to that extent, they have benefited in the last two to three years.
But this is an area that going forward needs to be watched a little more carefully, besides the execution of the PSU companies themselves in terms of what they have as current business on hand and orders on hand; even that needs to be watched.
Alongside this, we also need to keep a watch on the incremental ability of the government to keep spending on investments.
What are your views on the large private banks? Do you see value in them?
They have been in the value zone for a fair bit of time now.
In the last two to three years, quite a number of these have kind of underperformed the broader market and even the nifty.
There are two to three drivers of the banking space. The credit growth cycle today is positive. It is reasonably strong. It can moderate a little bit, but it is still likely to be reasonably strong as we see it.
The second is the volatility and interest rates, and the third is the asset quality-related movements.
We expect that interest rate volatility will be a little lower in FY25 compared to FY24.
The margins of banks may be a little more normal compared to last year when they faced a lot of pressure on deposits, but it is also monitorable.
Not necessarily a trigger, but something that we need to observe very carefully is the overall liquidity in the system.
The system liquidity has been quite weak in the recent past, so we need to watch for central bank strokes or government actions in that regard because that also has direct implications for things like deposit growth, which has been quite difficult to come by in the recent past, and that has been affecting the ability of banks to maintain their profitability.
The problem will be less severe in 2024 compared to what it was in 2022, especially given that the fiscal deficit is lesser, so there will be fewer challenges from the point of view of the RBI to ensure that liquidity in the system is kept tight; they may loosen up the tap out there.
The other thing is that India will see the inclusion of its bonds in the MSCI Global index sometime in May or June.
That will bring in their flows and add to the liquidity in the system. The challenge could be relatively lesser in FY25, and that will mean less pressure on the profitability of banks and their ability to counter interest rate volatility will be better.
The third is about the NPA cycle, which by and large has seen a very material improvement.
As we know, both for the private banks and in the last year, even in many of the public sector banks, there are a few residual public sector banks that are still in that process, and they will see some more reduction in NPAs in FY25.
But in general, we feel that the growth of private and public sector banks in profit growth will be quite similar or that the gap will narrow compared to what it has been in FY24.
In FY24, public sector banks did much better than privates at the overall aggregate earnings level. This may be somewhat lesser, or maybe the gap may not be as much in the next year, so earnings growth out of public and private sector banks will be quite similar.
Plus, public sector banks re-rated and their valuations have also moved up, as privates have suffered or have derated. So there is a fair possibility that we might see a reversion if not in the first half, then somewhere in the second half of 24-FY25, where all the private banks start to do better than the public sector banks; more value emerges in the private banks compared to the public sector banks.
But then there is this whole financial services space, which is becoming very vibrant, and India, especially given financial inclusion, is rising.
The government’s efforts towards everything, starting from identity to financial inclusion to UPI platforms, we believe that the non-lending space has therefore become quite vibrant, whether it is in the form of insurance, asset managers, brokers, wealth managers, or capital market intermediaries.
The part about non-lenders and the financial services space is now providing many more attractive growth opportunities over and above banks and lenders, such as NBFCs.
What sectors are you positive about for the next one to two years?
We believe that India is in a place where the investment cycle should remain reasonably strong but probably will become more dependent on the private sector versus the public sector as we go along incrementally.
We remain positive on industrial investment-related businesses and manufacturing-related businesses.
This is a reasonably core part of our portfolio. So across many strategies, we also see growth opportunities in some parts of the consumer discretionary space, particularly the mid- to high-end area of consumer discretionary.
It has to do more with urban spending and high-end spending, whether it be retail or consumer products in general. That is a segment that is still preferable.
We are incrementally getting more and more confident about healthcare and pharmaceuticals as a good, strong play after the reasonably longer gap of subdued performance over the last four or five years.
That’s another area that we are incrementally more excited about. We see value in banks and financial services, as we discussed, and we treat that more from a value standpoint.
We are watchful for possible ideas in certain global sectors like technology and commodities.
Technology has done well, but we are right now taking a neutral stance out there.
But as we get more evidence of growth in the US being relatively less affected and things stabilizing, that is an area where there could be potential upside and we may have the room to increase exposure and certain select commodities, which perhaps can make a comeback, which will be predicated on global developments.
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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: 04 Mar 2024, 01:21 PM IST