“We see ingredients in place for a positive next few years for the market with the largecap segment doing better than midcap and smallcaps,” he says. Edited excerpts from a chat:
What is your outlook on Samvat 2081? Do you think Nifty would give double-digit returns in the new year as well?
We believe the Indian economy is likely to continue to grow at a steady pace led by corporate capex (specially energy transition), real estate and bank credit picking up. Corporate earnings growth is likely to be better given the base for 2HFY25 and FY26. We also expect earnings delivery by banks to improve for FY26. Valuations for the largecap part of the market remain reasonable whereas midcap and smallcap segments are on the higher side. We see ingredients in place for a positive next few years for the market with the largecap segment doing better than midcap and smallcaps.
As market cycles change, winners keep changing. Given the key events lined up – RBI rate cut cycle (which will eventually begin in next few months), US presidential elections, etc – for the next one year, where do you think the puck is going to be in Samvat 2081?We think Financials as a sector and Banks specifically do offer better risk reward. We are betting on this segment of the market to deliver above average performance over the next few years. We think given the very positive regulatory environment for banks in terms of early warning, asset quality will remain strong over cycle enabling higher growth in credit and ROE, leading to better valuations.
Do you think earnings can be the biggest risk for the market? The Q2 earnings season isn’t turning out to be good enough, particularly given the elevated valuations that the market is trading at.
2024 is a general election year and government spending till date was muted along with corporate capex taking a pause in the short term. Tight monetary policy was an additional headwind for the economy. Q2FY25 reflects the impact of the above factors mentioned. Generally Q2 is also a lean season given the monsoon impact. We are hopeful of a pickup in capex activity in 2HFY25 and FY26. We are optimistic on the earnings rebound. Valuations have moved higher over past few years and hence earnings delivery by corporate India has increasingly become very important to sustain these valuations.
Is domestic demand, which was one of the biggest drivers of earnings growth, giving enough signs of slowing down? Can the upcoming festive and wedding season change the narrative?
Domestic demand is a mixed bag – some segments like commercial vehicles, passenger cars will probably consolidate on a high base of last year whereas real estate, 2-wheelers, capital goods (investment led) are likely to do well. India is in the midst of a positive investment cycle which is likely to lead to growth in consumer discretionary demand over the next few years. Our focus is long term and we continue to see healthy signs of a steady growth environment going ahead.
What is the kind of strategy that you’re following at this stage of the market where FIIs are pulling out, DIIs and retail investors are super-bullish and Q2 results are leading to downgrades?
Short-term corrections are always very healthy. Equity markets were in a one-way rally phase and expectations were running higher than reality to some extent. We at Tata Asset Management focus on the long term and as mentioned earlier, we see economic activity continuing at a strong pace and our macro fundamentals are extremely healthy making us positive for the long term.
Do you think that the correction in PSUs and capex plays is now nearing its end before the market starts focusing once again on the 2025 Budget?
We are optimistic on the capex cycle going ahead. We think manufacturing capex has been growing and now infrastructure capex led by energy transition is taking over. This phase is likely to see strong growth in overall capex and the trickle down impact on the overall economy including discretionary consumption is likely to be visible soon. Real estate is one of the largest contributors to economic growth – we are likely to see continuation of the positive cycle in real estate. We are always very selective in terms of choice of business to own in our portfolios and we are keeping a close watch on sharp corrections in some PSU/capex names.