In an interview with ETMarkets, Poddar said: “For the next six months, the trajectory of earnings for India Inc. appears promising, underpinned by recent trends indicating a robust performance in key sectors,” Edited excerpts:
June has been a volatile month for the Indian market, but bulls managed to keep the momentum going and pushed benchmark indices to fresh record highs. What is fuelling optimism?
Today (28th June, 2024) marked a historic milestone for our markets as we crossed the 79,000 threshold. Despite significant volatility to come in the first week of July, many market players anticipated this turbulence would create resistance to reaching new heights.
However, the Indian markets have demonstrated remarkable resilience. Our strong domestic macroeconomic indicators are driving this buoyancy.
In April and May, Foreign Institutional Investors (FIIs) were heavy sellers, but they have since turned net buyers, investing ₹ 201.70 Billion.
While we strive to reduce our reliance on FIIs, our Systematic Investment Plan (SIP) contributions are reaching record highs, reflecting growing confidence in the Indian markets.There was a time when a market crash was a nightmare, but now, Indian investors are seizing these moments as “Buy the Dip” opportunities. This shift in mind-set was demonstrated by the market’s reaction on June 4th.We have also completed 6 months of 2024 – how is H22024 looking? What are the important trigger points that investors should take note of?
Instead of viewing the market as a colossal entity, it is essential to dissect it into distinct categories for an easier understanding. Let us examine the recent performance data across segments:
– The mid-cap index has delivered a remarkable 24% return.
– The small-cap index has posted an impressive 20% return.
– The large-cap index has achieved a solid 13% return.
These returns are extraordinary, reflecting a period of robust performance.
However, the valuations in mid-cap and small-cap segments are concerning due to their elevated levels. This raises questions about their sustainability and potential for continued outperformance.
In contrast, large-cap stocks appear more stable and less overvalued, suggesting they might perform better relative to mid-caps and small-caps soon.
Several key factors could influence market dynamics in the future:
The possibility of rate cuts by the Federal Reserve could act as a market catalyst, provided the inflation data supports such a move.
Lower interest rates typically enhance liquidity and investor sentiment, driving asset prices higher.
The upcoming Indian budget is another such critical event. Historically, policy changes and tax adjustments announced during the budget have substantially impacted performance.
Investors should be prepared for potential market volatility around this period.
It is prudent for investors to temper their expectations for the second half (H2) of the year. The exceptional returns observed in the first half (H1) may not be replicable, and a more cautious approach is advisable.
The market is breaking new records every day and retail investors are buying the dip – the one like we saw post-elections. How are retail investors picking stocks? What are the trends you have seen in your fund house?
A significant trend of retail investors actively “buying the dip” during market corrections, was particularly noticeable following the unexpected election results on June 4th.
On this day, domestic investors were net buyers, injecting ₹21,179 crore into the market, while foreign portfolio investors (FPIs) were net sellers, offloading ₹12,511 crore.
This indicates that retail investors capitalized on the market downturn, increasing their exposure with the anticipation of a market rebound. The remarkable rise in demat accounts, from 40.8 million in March 2020 to 158.05 million, underscores the growing retail investor participation.
This growth is fuelled by financial inclusion, the availability of user-friendly trading applications, and a heightened risk appetite among individual investors.
Further, the increase in Systematic Investment Plan (SIP) volumes and participation in sector-specific funds highlights the proactive engagement of retail investors.
This suggests a broader retail trend of not only entering the market but also diversifying their investment strategies, and contributing significantly to the market dynamics.
How are earnings likely to pan out in the next 6 months? A recent trend suggests that prices have run up ahead of earnings upgrades.
While there have been notable increases in price preceding these earnings upgrades, the underlying strength in corporate profits suggests a resilient outlook.
For the next six months, the trajectory of earnings for India Inc. appears promising, underpinned by recent trends indicating a robust performance in key sectors.
We foresee further improvements in the Profit-to-GDP ratio for FY25, bolstered by expected expansions in Auto, Capital goods, Defence, Infrastructure (domestic capex), housing sector and rural consumption, alongside favourable economic conditions and anticipated normal monsoons.
Despite occasional economic challenges, in recent years corporate profits in India have consistently outpaced GDP growth, driven by enhanced profitability across various sectors.
As we navigate the next financial years, we remain optimistic about Indian corporates’ ability to capitalize on these favourable trends and deliver sustainable growth.
What are your expectations from the Final Budget 2024?
Disinvestment is a significant part of the NDA government’s agenda, as their stance remains firm. Capex must be prioritized as it aligns with the nation’s growth narrative, providing impetus for long-term economic expansion.
Micro, Small, and Medium Enterprises (MSMEs) could benefit from increased access to credit at lower rates, which would support their growth and stability.
Additionally, the manufacturing sector may receive more incentives, and the scope of the Production Linked Incentive (PLI) scheme could be expanded to include more sectors.
Given the recent election results fell short of expectations for the NDA, there might be a renewed focus on social expenditure, particularly in rural areas, to boost consumption, and drive economic activity.
The real estate industry has been vocal about its needs for the upcoming budget, including the reduction of stamp duty and improved access to capital for developers during acquisition and development processes.
Tax slabs to likely remain unchanged, as there appears to be no significant justification for alterations currently.
How are FIIs looking at Indian markets?
Equity Market: In early 2024, FIIs recorded substantial net sales – ₹ 35,977.87 crore in January and ₹ 15,962.72 crore in February.
However, from June 7 to June 27, FIIs shifted to buying, with net purchases amounting to ₹ 201.70 Billion.
Debt Market: FIIs demonstrated strong confidence with significant net purchases, including ₹ 56,311.60 crore in March and ₹ 21,974.84 crore in June 2024.
Motivations for Selling and Buying: Initially, India’s lower performance compared to China and Hong Kong drove FIIs to sell.
Recently, the anticipation of future rate cuts and a positive outlook post-election have spurred buying. Moreover, India’s inclusion in the JP Morgan bond index will also lead to inflows of at least 25-30 billion dollars to India.
Indian markets have seen significant fluctuations due to FII and FPI activities.
Early-year aggressive selling affected performance, but recent buying has driven market highs. Despite challenges, the long-term outlook remains positive, backed by domestic and foreign investments.
What about small & midcaps? Are there still stocks available at attractive valuations considering the run-up we have seen in this space or does the valuation methodology have to shift now?
While small and mid-cap stocks have seen significant run-ups (20% and 24% gains respectively), attractive valuations in this space have become scarce. Exceptional performance has led to elevated valuations, however sentiments remain sceptical of scalable growth.
Given this scenario, the valuation methodology may indeed need to shift. Investors should consider:
• Looking beyond traditional metrics like P/E ratios
• Focusing more on company fundamentals and long-term growth prospects
• Comparing relative valuations within sectors rather than broad market averages
It’s worth noting that large-cap stocks appear more stable and potentially less overvalued at this point. Investors might want to exercise caution with small and mid-caps, tempering expectations for the latter half of the year given the strong performance in the first half.
Key factors like potential Federal Reserve rate cuts and upcoming Indian budget announcements could influence market dynamics, adding another layer of complexity to valuations.
What are the themes that will be in focus in the next 6 months?
In the coming six months, our strategic focus will be on pivotal sectors expecting substantial growth. Specifically, we prioritize Auto, Capital Goods, Defence, Infrastructure (domestic capex), Housing, and Rural Consumption. Said sectors are strategically aligned with strong economic drivers and government initiatives.
Auto and Capital Goods sectors are witnessing a resurgence, driven by heightened demand and optimized supply chains. Defence and Infrastructure sectors benefit from ongoing government investments, offering significant growth opportunities.
The housing sector thrives amidst urbanization trends and supportive policies, while Rural Consumption remains buoyant due to resilient agricultural incomes.
SEBI on quant MF did shake up confidence among the MF investor community. Do you see more tightening measures coming from the regulator?
I am reserving judgment on the situation until all the facts are established. Currently, there are only allegations, and nothing has been proven.
Quant AMC is fully prepared to cooperate with SEBI, so it is prudent to wait and observe before making any conclusions.
Given the scale of the issue, I do not believe it will significantly disrupt the mutual fund industry.
Quant funds are heavily invested in large-cap stocks and maintain substantial cash reserves, so redemptions should not pose significant problems for investors.
Following the Axis episode, there was some impact on their funds, but it did not cause widespread panic within the industry.
Misconduct of this nature has been observed since the 1990s, but it has not deterred people from participating in the markets.
If the allegations are substantiated, the regulator will undoubtedly introduce stricter regulations and implement measures to prevent similar occurrences.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)