This is a market where one must avoid error of commission rather than the error of omission, he says. Edited excerpts:
What is your outlook on Samvat 2081? Do you think Nifty would give double-digit returns in the new year as well?
Returns are a function of a multitude of factors like valuations, earnings, fund flows, sentiments etc. Currently, some of these factors are not exactly poised to make markets appear attractive to investors whose investment horizon may be 12 months or Samvat 2081. For instance, currently, valuations seem to be rich. At the same time corporate earnings are hitting a slowdown. FII flows too are turning negative amidst a volatile geopolitical environment. As a result, we are cautious in this environment with respect to short term outcomes in the market. As a life insurance company managing the life savings of customers we have a long-term investment approach. We believe the long-term prospects of the Indian equity markets are positive.
As market cycles change, winners keep changing. Given the key events lined up – the RBI rate cut cycle (which will eventually begin in next few months), US presidential elections, etc. – for the next one year, where do you think the puck is going to be in Samvat 2081?
We expect the markets to be volatile over the next 12 months given the current geopolitical events unfolding coupled with the impending US elections. The US debt too is rising at a fast pace and is in turn putting pressure on US bond yields as their central bank is not buying these bonds anymore to fight off the inflation.
A lot depends on the US presidential elections as there could be a mismatch in the expectations of the people. We also have to factor in the policies likely to be rolled out after the elections. Policies such as onshoring/reshoring manufacturing, restrictions on technology transfer to China, sanctions being imposed on Russia & Iran and others will be clear only after the election results and are likely to influence markets. In such an environment, investors should seek some cushion of safety in terms of valuations along with better corporate performance and management quality.
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Tell us which pockets of the market you see most of the opportunity lying in the new year.
There are a few sectors that offer a relative cushion in terms of valuations along with reasonable earnings growth over the next 12 months, large private banks being one such sector. Select consumption themes albeit expensive on the valuations front look promising due to the growth trajectory they are likely to exhibit. We believe these also offer a good investment opportunity.
Do you think earnings can be the biggest risk for the market? The Q2 earnings season isn’t turning out to be good enough, particularly given the elevated valuations that the market is trading at.
The current earnings season has shown a slowdown in corporate earnings. Several companies have declared earnings much below expected levels, only a few have delivered a positive surprise.
As a result, we are witnessing the market is cutting earnings estimates which in turn is putting pressure on valuations as currently they appear to be richer than what initially appeared to be.
Over and above that the pace of corporate earnings growth itself has moderated as compared to FY2223 and FY2324 where the topline and margin improvements saved the day. Thus the slowdown in earnings is emerging as a risk for the markets.
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?
There are clear signs of growth moderation in earnings even if one may argue about the broader slowdown in the economy. The GST collection growth has come down to single digits as compared to double digits a few months back. Credit growth in the system too is softer compared to previous years as banks/NBFCs are witnessing bouts of stress in their unsecured retail loan portfolios, especially micro-finance companies.
The government expenditure on a year-on-year basis is expected to be lower as per the budget estimates vs FY2024, especially on the capex front where the government expects the private sector to take over the mantle. The upcoming festive and wedding season can only be a temporary boost. Long-term health of the economy will be driven by how productively its workforce can be deployed, which is influenced by government policies.
What is the kind of strategy that you’re following at this stage of the market where Q2 results are leading to downgrades and impacting market sentiments?
We have a bottom-up investment approach rather than a top-down. We prefer to invest in companies where we have comfort on earnings, valuations along with quality of management. This is a market where one must avoid error of commission rather than the error of omission.
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?
In the short-term valuations are driven by changes in sentiment and the demand-supply factor. However, over time this gets ironed out and stocks perform in-line with their earnings performance.
Several PSU and capex companies were not the favourites for extended periods of time prior to the pandemic but attracted investors in the last year. Investors in these companies have reaped stupendous returns as the valuations of these stocks inched up, this was also supported by robust earnings performance. However, we are likely to witness moderation in earnings as margins and growth normalise in line with long-term fundamentals. As a result, valuations are likely to settle lower than current levels for many companies over time. That may happen either through time correction or price correction and will have an impact on the stock returns.
