“This involves reallocating investments from overvalued sectors to those with more attractive valuations. For example, while IT and Financial Services have seen significant run-ups, sectors like Pharmaceuticals, Infrastructure, and Energy still offer attractive entry points given their growth potential and alignment with India’s economic development,” he says.
Edited excerpts from a chat:Given the valuations Dalal Street is trading at and the stellar returns that investors have made in the last few years, how bullish are you on India?
India’s stock market has been a global outperformer, with the Nifty 50 delivering a stellar 40.9% return over the past year. However, this has also led to stretched valuations which necessitate a more nuanced approach to investing and trading on Dalal Street.
Despite the elevated valuations, India’s macroeconomic fundamentals remain robust, driven by strong domestic consumption, government infrastructure spending, and a resilient financial sector. The projected GDP growth of 6.5% for FY2025 underpins the bullish outlook, although investors must now focus on companies with strong earnings visibility and sectors aligned with India’s long-term growth trajectory.
Given the high valuations, sector rotation is an effective strategy. This involves reallocating investments from overvalued sectors to those with more attractive valuations. For example, while IT and Financial Services have seen significant run-ups, sectors like Pharmaceuticals, Infrastructure, and Energy still offer attractive entry points given their growth potential and alignment with India’s economic development.
Which pockets of the listed market are you looking at or invested in?
In this environment, a focused approach is essential. Infrastructure remains a key area of interest, supported by government initiatives such as the National Infrastructure Pipeline (NIP) and the Gati Shakti initiative. These projects are expected to mobilize over $1.5 trillion by 2025, providing significant opportunities for companies like Larsen & Toubro (L&T), which is well-positioned to benefit from this infrastructure push.
The financial services sector, particularly private banks and NBFCs, also offers attractive opportunities. HDFC Bank and ICICI Bank are prime examples, benefiting from rising credit demand and improving asset quality. Additionally, the consumption sector, driven by India’s expanding middle class, presents compelling opportunities in FMCG, retail, and e-commerce .
For traders, momentum trading in high-growth stocks such as Tata Consultancy Services (TCS) and Infosys in IT, and HDFC Bank in financial services, can be particularly effective. These stocks have consistent earnings growth and strong market leadership, making them ideal for momentum strategies.
A recent survey of global fund managers by BofA showed that most have shifted their preference from infra to consumption theme in India. What about you?
The BofA survey reveals a broader global trend toward capitalizing on India’s consumption-led growth story. While this shift is understandable given India’s demographic dividend and expanding middle class, it’s crucial not to overlook the infrastructure sector. Despite the tilt towards consumption, infrastructure investments remain foundational for India’s long-term growth .
A balanced approach that includes both consumption and infrastructure sectors is prudent. Consumption-driven sectors, particularly in FMCG and e-commerce, offer near-term growth, while infrastructure continues to be the backbone of sustainable economic expansion. Companies like Divi’s Laboratories in pharmaceuticals and L&T in infrastructure are examples of how diversification across these sectors can provide both stability and growth.
Recently, fresh allegations by Hindenburg in the Adani controversy made headlines. As a foreign investor, do you get worried after reading such reports, or do you think it was much ado about nothing?
For foreign investors, the key is to focus on the fundamentals. The Adani Group, despite the controversies, remains a significant player in sectors critical to India’s growth, such as infrastructure and energy. The recovery in market cap (from the lows of last year) suggests that the market is beginning to look past the controversy and focus on the long-term potential of these assets.
Investing in Adani stocks should be part of a diversified portfolio strategy that leverages the group’s strong market positions, especially in sectors that align with India’s broader economic goals .
Are you invested in Adani stocks or looking to invest?
Investing in Adani stocks aligns with a long-term strategy focused on India’s infrastructure and energy needs. The group’s resilience, as demonstrated by the recovery in its market cap from ₹10 lakh crore to around ₹18.5 lakh crore, indicates strong underlying fundamentals .
For traders, employing options strategies like covered calls on Adani stocks can generate additional income while providing downside protection. This is particularly useful given the volatility surrounding the group. Additionally, a protective puts strategy can hedge against adverse price movements, offering a floor on potential losses while maintaining upside potential.
Recently listed startups like Ola Electric, Unicommerce, and Firstcry have got a good response on Dalal Street. What’s clicking now? Earlier there was a lot of disdain for new-age companies?
The market’s warming up to new-age companies like Ola Electric, Unicommerce, and Firstcry reflects a significant shift in investor sentiment. These companies are tapping into high-growth sectors such as electric vehicles and e-commerce, which are projected to grow substantially in the coming years.
For traders, momentum trading in these stocks can be particularly effective, as they continue to exhibit strong price trends. Additionally, pairs trading—going long on one stock while shorting another within the same sector—can capitalize on relative performance. This strategy mitigates sector-wide risks while allowing traders to benefit from individual stock movements.
FIIs have been pulling out money incessantly from Dalal Street ever since capital gains tax was raised in the Budget. How big a worry is the tax hike for investors?
The increase in capital gains tax has led to significant FII outflows, with over $3 billion pulled out of Indian equities in the first half of 2024. This has added to the volatility on Dalal Street, particularly in sectors sensitive to foreign investment.
However, it’s essential to consider the broader context. While the tax hike is a concern, India’s economic fundamentals remain strong, and the long-term growth prospects of its equity markets continue to attract global investors. Diversifying into other asset classes, such as corporate bonds or gold, can provide stability and enhance returns, especially in the current low-interest-rate environment.
In conclusion, while the Indian market faces challenges, it remains a compelling investment destination, particularly for those with a long-term perspective. Leveraging advanced trading strategies such as sector rotation, options trading, and pairs trading, coupled with a focus on standout companies, will enable investors to navigate the complexities of Dalal Street effectively.