Edited excerpts:
The market is at an all-time high despite looming risks. Can we say the worst for the market is behind?
India’s outperformance, we believe, has been on the back of the trinity of (a) macro-economic stability, (b) strong corporate earnings, and (c) inflows (both domestic and FII).
While earnings have been holding up well, valuations have also moved up. Valuations are now above fair value.
Nifty is now trading somewhat above long-term average valuations on a P/E (price-to-earnings ratio) and P/BV (price-to-book-value) basis (one-year forward).
Similarly, India continues to trade at a premium to emerging markets and the premium is now slightly above long-term averages.
Midcap and small-cap valuations are above their long-term averages.
On a relative basis to large caps, mid and small-cap valuations are at significantly higher levels as compared to long-term averages.
Hence, despite strong fundamentals, with the sharp up-move in the market, one must be prepared for some volatility in the near term even as the long-term argument for Indian equities and India’s growth story remains unchanged.
The domestic economy is on a strong footing but the risks of rising crude oil prices and a poor monsoon loom. What is your view on the domestic macroeconomic atmosphere for the next 6-12 months?
The macroeconomic backdrop for India remains fairly buoyant with India standing out as an oasis in the desert.
India’s macro fundamentals look resilient, for now, with (1) steady growth and (2) core inflation largely in check.
India remains one of the fastest-growing large economies in the world.
Q1FY24 GDP growth stood at 7.8 per cent year-on-year (YoY).
Investment growth in India has seen a pick-up led by public sector capex focussed on roads, railways, defence and water.
Any acceleration in private capex could further improve growth prospects.
More companies globally are also adopting a “China plus one” strategy and setting up manufacturing operations in India, boosting the country’s long-term outlook.
In the near term, the rise in crude oil prices warrants close monitoring on the external front. However, forex reserves stand at nearly $594 billion which provides the much-needed cushion to help manage currency volatility.
The other key factors to watch out for in the near term would be the inflation trajectory and the commentary from RBI along with the progress of the South west monsoons.
Unseasonal weather conditions have impacted food prices which has led to higher headline CPI inflation in the near term.
On the other hand, core inflation has been stable.
However, as seen in the past, vegetable prices tend to be volatile and can potentially be corrected swiftly as well.
What sectors are you positive about for the next two to three years? Can we still bet on banking stocks? Is it time to increase exposure to cyclical sectors?
Consensus Corporate earnings estimates have so far been largely stable for FY24 and FY25 and holding on in the range of mid to high teens earnings growth for Nifty 50 companies with margin improvement as the key driver for earnings growth.
A lot of the earnings growth has been driven by domestic sectors such as banks, industrials and automobiles while the volatility in terms of earnings delivery continues for many global-facing sectors.
Given this backdrop, we remain positive on many domestic-oriented businesses.
Some of the themes we are positive about are (a) capex cycle revival, (b)increasing penetration of financial services, and (c) capitalising on global supply chain shifts.
We are seeking to identify sectors and companies with strong earnings potential, superior management quality and corporate governance practises but trading at reasonable valuations.
We remain positive on sectors such as industrials, manufacturing, infrastructure and cement.
Some of the other sectors we are positive on are auto and auto ancillaries, BFSI and home building.
We remain cautious about global cyclicals such as metals.
How do you see the interest rate trajectory from here on? When do you expect a cut in interest rates by the Fed?
We expect that the policy rate trajectory has peaked in India and RBI is likely to stay on hold in the near term.
While the headline CPI inflation in India is above RBI’s comfort zone at present, it is largely on the back of higher food prices, which can be volatile. Already we have witnessed a sharp correction in vegetable prices.
Core CPI inflation has been under control. However, oil prices would be the key to watch out for. For FY24, we expect average CPI inflation to remain within RBI’s comfort band of 4 per cent (+/-2 per cent).
The future direction of policy rates will likely be determined by the action of the Federal Reserve and the domestic CPI inflation trajectory. The course of action adopted by the US Fed would largely be data-dependent.
At this point in time, it appears unlikely that the US Federal Reserve will cut interest rates in CY23. The Fed funds futures seem to suggest that the first-rate cut would likely be in May – June of 2024.
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Updated: 19 Sep 2023, 10:58 AM IST