“We see good opportunities in Consumer Staples, Mass Consumption, Consumer discretionary, and the Pharma Space. These sectors can help mitigate impact on the portfolio from sharp volatility in the near term, while also having reasonably good potential to deliver attractive returns in the medium term, driven by potential earning upgrades,” he says. Edited excerpts from a chat:
The Q2 earnings season isn’t turning out to be good enough, particularly given the elevated valuations that the market is trading at. What is your reading of the overall numbers so far?
It is too early to provide a view on earnings surprises. Having said that, the earnings have been somewhat on the weaker side. However, prolonged monsoon, uncertainties related to the general election, and the union budget have ensured that expectations aren’t too demanding either. More clarity will emerge by the end of the month, as a majority of the companies will have reported their earnings by then.Also read | Sensex, Nifty record worst month since Covid market crash. A warning sign?
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?
Over the last three years, the drivers of domestic demand have been urban consumption and premiumisation. This is changing. From here on, domestic demand – will be driven by a recovery in rural demand and a pickup in mass consumption. A good monsoon and a bumper kharif harvest are expected to improve farm incomes. Furthermore, higher social spending by state governments is also helping the rural economy recover cyclically for the first time after COVID-19.
Do you think earnings can be the biggest risk for the market in Samvat 2081?
The expectations for earnings are already muted this year. The consensus for earnings growth for NIFTY-50 is barely in double digits. If earnings disappoint even these undemanding expectations, it could certainly emerge as a key reason for market correction. A more important factor to watch out is how much faith first-time retail investor keeps as they see ‘red’ in the portfolio for the first time in this correction. This is particularly important, as domestic flows have acted as key counter balance to FPI outflows in recent times.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?
We have aligned the portfolios towards higher large-cap exposure. We believe the risk-reward balance is more favorable in large caps companies. We have increased our allocation in consumer staples, pharma, and technology, while reducing allocation in industrials and autos. Another area we like is the large private banks and private insurance space. We find both valuation and growth comfort in these two sub sectors within financials.
What is your outlook on Samvat 2081? Do you think Nifty would give double-digit returns in the new year as well?
Equity investors should invest in equities with a long-term time frame of at least three years. In the long term, we believe corporate India’s earnings can grow at around the mid-teens level, which should get reflected in equity returns for investors.
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?
PSU and capex have done really well over the last three years, with the exception of the last three months. The primary driver of this was increased government spending on capex. However, there is an increased possibility of government spending moving towards social welfare rather than capex, especially after the electoral disappointment in this year’s general elections. These stocks still trade at a premium to their historical valuation, so it will be too early to call out an end to the underperformance of these stocks.
Talking about the US elections, in case Donald Trump wins do you think there would be as many Chinese bulls in the market left as they are now?
There is a high possibility of trade/tariff war getting reignited if Donald Trump comes to power. However, as the second largest economy in the world, China will attract its fair share of capital and investors’ interest. There is also a possibility of some reallocation of investments from India to China by emerging markets funds. Having said that, over the long-term, China and India can co-exist as attractive investment destinations, as was the case during the pre-COVID period.
With little or no support from earnings, do you think large pockets of the market are overvalued even now?
We believe there is a reasonable froth in midcaps and small-cap space, even after the recent correction. One has to be specifically careful of companies with lower free float as these stocks can move sharply in either direction due to their limited liquidity. From a sector perspective, we still believe PSU, Defence and some capex-driven businesses are still in the overvaluation zone.
Tell us which pockets of the market you see most of the opportunity lying in Samvat 2081.
In the current environment, we are more comfortable in largecaps and quality space. We see good opportunities in Consumer Staples, Mass Consumption, Consumer discretionary, and the Pharma Space. These sectors can help mitigate impact on the portfolio from sharp volatility in the near term, while also having reasonably good potential to deliver attractive returns in the medium term, driven by potential earning upgrades.