In an interview with ETMarkets, Shami said: “Sectors such as consumer durables, FMCG, private sector defence, tourism and realty have unfavourable risk-reward expectation in the future,” Edited excerpts:
Thanks for taking the time out. Geopolitical concerns and political uncertainty in some of the countries weighed on markets in early December. What is your take on the markets?
We have already witnessed a strong recovery from the correction seen since end of September this year. Events around US elections induced FII selling across the globe and nearly all major markets other than US saw correction of various magnitudes in the last quarter.
Essentially, there was no issue specific to the Indian market or to the fundamentals of the Indian economy.
The market has digested the continuing geo-political concerns and with the new US president taking an anti-war stance, there are high chances that various regional wars shall eventually stabilise in the near future.
We believe that geo-political certainty is emerging and it will be good for the markets.
The Nifty50 should hopefully close the year with double-digit gains. How do you see markets in 2025?
We see that the Indian economy is at a point of inflection to enter an era of sustained high growth.
A stable government at the centre, along with the recent political mandates in the key states, has taken away the political uncertainty for the economy and the markets. Strong capital expenditure by the government and private sector investments over the last few years have laid down a strong foundation for the future growth.
Currently, we have a twin balance sheet opportunity where the private sector has strong, deleverage balance sheet and is likely to borrow and invest heavily, especially in the capex heavy sectors such as infrastructure and manufacturing and on the other side the banks have one of the strongest balance sheets with high capital adequacy ratios and low NPAs, enabling them to lend more.
Starting with the upcoming budget, we expect to see further clarity on the economic growth blueprint. For 2025, we expect double digit growth in earnings and re-rating in the select market segments, and hence, 2025 could be significantly rewarding for investors.
What will drive markets in 2025? Factors which investors should watch out for?
While the current focus is on 2025 outlook, we would like the focus to remain on the multi-year growth opportunity that is in the front of long-term equity investors.
As discussed above, we are in a Virtuous Cycle of growth which has been set off through continuous policy reforms and significant investments on building the digital and physical infrastructure.
In the last 5 years, government has allocated more than 50 lakh crore on capital expenditure and it is expected that more than 100 lakh crore could be allocated in the next 5 years for further capital expenditures strengthening the growth engine.
The near-term factors to focus on are policy continuation in the upcoming budget, moderation in inflation, interest rate cut by US Fed and RBI and geo-strategic developments including friendshoring and China + 1 policy, which all are favourably positioned so far.
What are your expectations from Union Budget 2025 – the first Budget of Modi 3.0?
We expect the government to continue with its long-term vision of Amrit Kaal leading to a Viksit Bharat. We continue to make significant progress on the PM GatiShakit initiative which is helping to build the logistics infrastructure.
The focus now is on improving the producing power and the buying power of the economy by focusing on manufacturing policy and allocations for inclusive development through employment and skilling.
In view of a US tariff war, we can expect certain manufacturing/export incentives for a set of sectors such as electronics, pharma, chemicals, energy transition, defence, etc. We also anticipate a US-India trade deal to materialize soon.
Should Indian investors also add a bit of crypto in their portfolio in 2025?
We do not see crypto as an asset class that can command any significant allocation in Indian investors portfolio. The current chatter is fuelled by FOMO with bitcoin spiking to a number which psychologically sounds significant.
This is because if we look at the bitcoin returns in the last few years and compare it with returns generated through a number of growth vectors, identified over the same period, such as defence, railway infra, power, etc.
We see that these fundamentally driven growth vector portfolios had significantly lower risks while they generated exceptionally high returns all along with a reasonable level of fundamental predictability of the underlying businesses for investors to hold on to their investment even in cases of adverse price movements.
For scientific investors, who do not identify crypto as an asset as it does not generate any cash flow and the related challenges around its valuation, shall only see a minor allocation in a basket of securities held for inflation protection such as precious metals.
Which sectors look attractive for investment in 2025 where risk-to-reward is favourable after recent correction?
We have a positive outlook on the financial services and power sector. We expect long-term double-digit earnings growth for both and currently the companies from these segments are available at a significant discount to their intrinsic value.
Investors with a 3 to 5 year horizon can continue to allocate capital with any market correction. While most of the industrial sector companies are at their peak valuations, we find value in the business and commercial services space with double-digit growth potential and 4-5% earnings yield.
We also continue to allocate to defence and railway portfolios where we have achieved favourable portfolio valuations by broad-basing the theme and identifying new mispriced opportunities.
Any sectors in which investors can look to pare their weightage in the portfolio?
Investors should stay away from the overvalued sectors and the sectors where the long-term growth visibility is missing.
Sectors such as consumer durables, FMCG, private sector defence, tourism and realty have unfavourable risk-reward expectation in the future.
Also, for index investors, we believe that investors could be better off investing in large cap space compared to the midcap and small cap space which can see subdued returns till the valuations revert to normal levels.
What is your take on Gold & Silver for the year 2025? Should investors increase their proportion in the new year and what is the ideal weightage?
Both Gold and Silver have generated high returns of around 20% in this year. Going forward, the likelihood of lower returns could be higher with lower expected inflation numbers and relative higher levels.
Gold and silver continue to find their place in a multi-asset allocation portfolio with weightages ranging from 5-20% depending on your risk profile and financial goals.
It is important to rebalance your portfolios periodically and especially after a particular asset class has generated higher than expected returns.
Which theme will work best – growth or value in 2025?
We believe that the actual theme that will work in 2025 and beyond is ‘discount to intrinsic value’. Classifying stocks as growth or value on the basis of P/E or P/BV multiples is too naïve and does not work in real market conditions.
One needs a sophisticated approach such as scientific investing framework to identify fundamentally strong companies which are exposed to certain growth vectors and are available at discount to their intrinsic value and then build a portfolio to capture multiple sources of alpha, viz., higher yield, higher growth and upward re-rating.
For first-time investors – how should they go about constructing the portfolio in 2025?
First-time investors should understand the importance of a structured asset allocation framework so that they can remain invested for a long period and also can allocate a significant amount of capital to equities.
It is even more important in the current situation as a large number of first-time investors have practically seen only a strong bull market and may find it difficult to survive through a deep correction, if or whenever it occurs.
We recommend one should allocate significant capital to equities, of course, in line with their risk appetite and risk tolerance, to build long-term wealth.
A significant portion of this equity allocation should further be allocated to core portfolios of largecap & multicap strategies and the remaining be allocated to multiple growth vectors to take exposure to potentially high growth opportunities which are mispriced.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
