“At current levels, large-cap stocks present a relatively better risk-reward profile. However, for small-cap and mid-cap stocks, favourable liquidity conditions, ongoing government reforms to boost domestic manufacturing, and fewer global trade restrictions are crucial for further growth,” he says.
Edited excerpts from a chat:
FII outflows have been one of the biggest reasons for the market downfall in the last few weeks. Are foreigners more worried about valuations and earnings growth slowdown or is it just about the China trade?
Over the past few months, there has been significant selling by foreign institutional investors (FIIs) in Indian equity markets which can be attributed to several factors. Firstly, Indian markets have experienced a substantial run-up over the last few years, pushing valuations above their long-term averages. Additionally, the stimulus from China came at a time when FIIs were significantly underweight on China within their emerging market allocations. Furthermore, the return of the Republicans to power in the US has boosted investor confidence in the US economy, making other markets less attractive. Despite these factors, we believe that Indian equity markets continue to hold promise from a long-term perspective.
FIIs have sold Indian stocks worth nearly Rs 1.2 lakh crore in October and November month so far. Do you think the selling is getting overstretched and a U-turn is due anytime soon?
Predicting whether this trend will continue or reverse could be anybody’s guess. However, given the medium to long-term positive outlook for the Indian economy, it is likely that FIIs may reconsider investing in India once valuations become more reasonable. Additionally, the recent selling has led global Emerging Market (EM) funds to shift to a marginally overweight position on India, compared to the 10-year average overweight position of ~3.5%.
A number of stocks are down around 30-50% from their 52-week high levels. Are you using the recent correction to increase allocation and buy some of the stocks available at relatively attractive valuations?
Over the past month, markets have experienced a sharp correction, with frontline indices dropping by over 10%. The decline has been even more pronounced in some mid and small-cap stocks, where prices had significantly outpaced earnings, and in cases where Q2 earnings were disappointing. Despite the current downturn, we remain committed to our investment philosophy of purchasing high-quality businesses at reasonable prices. We continue to seek opportunities where we believe earnings growth is sustainable.
PSU banks have stood out in the earnings season. Investors are also hopeful on IT and pharma but consumption has taken a hit as a theme in the near term. In the current scenario, how is HDFC Multi Cap Fund positioned in terms of sectors?
At the broader level, we are positive on sectors with good prospects of earnings growth and where the valuations are reasonable.
Currently, in my view, some of the banks seem well placed given their strong balance sheets, healthy credit growth, good asset quality and reasonable valuations. Also, I am also positive on consumer discretionary sector given that India is likely to become a high-income economy over the medium to long term. With change in power in the US, IT spending may increase going forward. Also, tax rate cuts in the US could be positive for this sector. The power sector in India, also offers some interesting opportunities given the power deficit situation in the medium-term demand-supply equation.
How do you think is the Q2 earnings season as a large number of NSE 100 companies have delivered disappointing numbers?
It is noteworthy though that post-Covid there has been a marked improvement in corporate profitability across large, mid and smallcap segments, which in a way, played a part in the robust equity market performance over the past few years. Going forward though, one needs to temper down expectations of earnings growth. With tailwinds from easing raw material costs well behind us, the recently concluded Sep-24 earnings season has seen sluggishness across most segments of the market. This sluggishness could be expected going forward too as base effect is not too favourable.
Is most of the earnings downgrades already factored in the price or more pain is there in the offing?
According to management commentary, the market anticipates a sharp recovery in earnings in the second half of FY25E, driven by increased government capital expenditure and consumer spending. At current levels, large-cap stocks present a relatively better risk-reward profile. However, for small-cap and mid-cap stocks, favourable liquidity conditions, ongoing government reforms to boost domestic manufacturing, and fewer global trade restrictions are crucial for further growth.
Do you see chances of recovery in consumer demand beginning from the December quarter? Early signs during the festive season have been encouraging.
Consumer spending is expected to see a seasonal boost due to a stronger marriage season, better crop yields and realizations, and increased government spending on various welfare schemes. However, rising agricultural input prices are impacting profit margins.
How attractive has the market become after the dip from the perspective of 2-3 years?
Broad market correction over the last couple of months has provided some valuation comfort in certain segments of the market. However, one still needs to be selective with stock selection considering the weakness in earnings and in view of the sharp re-rating that has happened in Small and Mid-Cap segments over the last year and half.
In terms of asset allocation, is it time to gradually start increasing weight on equity and cut down on debt and gold?
The saying “no size fits all” is particularly true in the realm of investing and personal finance. Each person has unique goals, needs, and aspirations, making a one-size-fits-all approach impractical. Retail investors should seek the guidance of a financial advisor to develop an asset allocation plan tailored to their individual circumstances, liquidity needs, goals, and risk tolerance.
Typically, investors allocate their assets among various classes such as equity, debt, and gold. For short-term needs, debt funds positioned at the shorter end of the yield curve are often considered to help mitigate interest rate risks. For long-term goals, equity mutual funds are usually preferred as they have the potential to create wealth over time.