Edited excerpts:
What is your assessment of the current market structure? Where is the Indian stock market heading?
There are two ways that I would look at the current situation:
1. Versus pre-COVID: The Nifty 50 is currently trading at nearly 22.5 times the trailing 12-month (TTM) price-to-earnings (PE) ratio, compared to 26.5 times (three-year pre-COVID; 13 February 2017 to 14 February 2020). Nifty 50’s median TTM PE post-COVID (i.e., from Aug’21 to date) is nearly 22 times. Clearly, we are not at the peak yet.
2. Compared to pre-election results: On 31 May 2024 (before the last phase of polling and pre-exit poll results), the Nifty 50 was trading at 21.4 times TTM PE, and currently, it is at 22.2 times. Here, too, we can see that the market has increased by over 3.5 per cent.
On combining these data points, I can draw two main inferences:
1. Markets are not in a euphoric state as they traded at a higher valuation pre-Covid
2. Markets have moved on from the election verdict and are eyeing the upcoming Budget, better monsoon, and interest rate downcycle.
While the headline index has maintained and rather increased the “Modi premium,” there seems to be some sector rotation underplay in the markets.
Allocations to ‘rural recovery’ and ‘exporters’ as a theme are increasing while no incremental capital is being deployed in the domestic cycle.
This indicates that the market wants more clarity on the government’s spending plan before allocating more capital to domestic cyclicals like infra, capital goods, railways, etc.
How has the outcome of the Lok Sabha election influenced your view on the stock market’s prospects?
There has been no change in my view on the markets due to the election verdict.
India’s growth story has a strong foundation and a long runway ahead.
We have seen multiple periods of political uncertainty in India and have still delivered stronger GDP growth.
The current situation is much better. In my view, a supportive coalition and stronger opposition will only help to check ‘excesses.’
I continue to remain fully invested in my multi-asset fund with higher equity allocation.
What are your expectations from the Union Budget 2024? Should we expect the government to take populist measures after the election outcome?
The government has done an excellent job in recent years in ironing out supply-side issues in the economy.
I think focusing on the demand side will add more value to the current situation.
The government has two primary issues to address: Income disparity and inflation.
Addressing both these issues will help create demand.
The RBI’s bonanza payout of ₹2.11 lakh crore to the government is more than enough to take care of any populist measure the government wants to undertake.
However, if the finance minister chooses to re-distribute a part of the interim budget spending allocations in favour of welfare spending and use RBI’s payout to lower the fiscal deficit targets even more, then it could be a shot in the arm for the economy.
This will mitigate the potential increase in inflation (due to welfare spending) with the lower fiscal deficit – a well-balanced fiscal policy!
What is your outlook on inflation and growth dynamics in the country? How are these two economic factors expected to develop for the rest of the financial year?
I am optimistic about both inflation and growth moving in a favourable direction.
Recent commentary on Brent by OPEC suggests prudent fiscal and monetary policy should reduce inflation from now on.
Various agencies have already upgraded multiple GDP growth estimates in the last couple of months.
Growth will accelerate as the new government starts its fiscal spending, along with a strong monsoon and potentially lower interest rates.
Should we expect a rate cut from the US Fed and RBI in 2024? Will it be a shallow cut?
Canada and the European Union (EU) have kickstarted the interest rate downcycle in 2024.
The data points from the US are conflicting in nature.
On one side, we have a surprise inflation drop; on the other, the Fed’s dot plot indicates only one rate cut in 2024 compared to three earlier.
We should have at least one rate cut in the US and India in 2024.
The quantum of the first-rate cut is difficult to estimate.
I believe this upcoming interest rate cut cycle would be more gradual and maybe shallow than the previous cycles.
The reason for that is strong GDP growth rates (even during the ongoing higher interest rate environment) and uncertain geopolitics leading to volatility in inflation.
What sectors look positive at this juncture for the next one to two years?
Over the next one to two years, we expect sectors like auto (two-wheelers), power, metals, infra, financials and capital goods to outperform the broad indices.
Power: India has come to being a power deficit country from a surplus status a couple of years ago.
This sector has a long project build-up period and requires massive upfront investments.
Once a project starts to build, it should be completed within time to be financially viable.
Therefore, the investment cycle in this sector lasts for years.
We continue to draw optimism from the government’s recent awarding of multiple projects in recent quarters, both in renewable and non-renewable space.
Interestingly, it is one of the sectors where capacity buildup is underway globally.
One of the major reasons is that EVs—energy consumption for transport—are now shifting from oil to electricity.
Autos (two-wheelers): This sector is a direct play on improving the economics of India’s hinterlands.
Surplus monsoons and the potential increase in public welfare expenditure by the government are the biggest short-term catalysts here.
Infra, capital goods, and metals: These sectors largely benefit from increased capital spending.
The modernisation of rail coaches, metro construction across various cities, the PLI (production-linked incentive) scheme backing private capex, the urban and rural housing schemes (PMAY), the Jal Jeevan mission, etc., are the catalysts driving these sectors.
Financials: There can be no sustainable GDP growth without financing, which is the key economic ingredient along with labour.
The sector has recently underperformed in the high interest rate environment – which reduces demand for credit but also causes an increase in delinquencies.
If inflation declines and interest rates follow the path, the sector is poised to make a strong comeback.
However, let me put a caveat here: We may see near-term pain before witnessing improving fundamentals – there will be a lot of good entry points for medium-term investors.
I have a bit of a contrarian view of the sector.
How should we play mid and smallcap segments? Do you see froth in these segments?
Yes, certainly, there are multiple companies/sectors where stocks have run ahead of their fundamentals.
We are cautious of situations in which the stock is either pricing in flawless execution and earnings delivery or placing high confidence in two-year forward earnings.
Our contrarian bets have started to pay off, and we continue to focus on a bottom-up stock selection strategy.
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Disclaimer: The views and recommendations above are those of the expert, not Mint. We advise investors to consult certified experts before making any investment decisions.
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Published: 19 Jun 2024, 03:01 PM IST