Listen to this article
What is your near term outlook for equity markets?
At a global level, the US debt ceiling is the major shadow looming over markets. The second factor has been the reappearance of COVID in China. In case the situation worsens, one could experience some pullbacks to global growth thereby impacting commodities and crude prices.
Coming to local markets, the developments on the monsoons will be the key to markets. The two major forecasters – IMD (lower end of normal forecast) and Skymet (below normal forecast) have varying forecasts at this point and this has implications for primary articles inflation and thereby the future course of RBI actions, rural incomes and thereby growth as well. In our view a clearer picture could take around 2 months but any delays or changes in the quantum could impact sentiment on markets.
Recent staggered withdrawal of Rs2000 notes is expected to be largely market neutral as the currency being withdrawn is much smaller than the quantum in 2016 and the prevalence of non-cash means such as UPI has also risen sharply. It could potentially at the margin benefit banks (bringing back some deposits into the system) and boost some high ticket spending (gems & jewellery, luxury brands etc) and certain cash sensitive sectors (real estate etc) could see some marginal pullback in demand.
What are the major triggers for the market currently?
In our view, a good monsoon at the start of the season may facilitate early kharif sowing. Also, with comfortable reservoir levels (21% above 10-year average for the country) may help India in case monsoon is delayed or wanes in future course. A good monsoon would help in easing pressure on agriculture production and thereby helping rural demand.
Easing of headline inflation on back of soft food prices and correction in global commodities could help the economy going ahead.
Recession fears across globe continue to be an overhang. China reopened with strong growth indicators but that has now started to fade. Slowdown in China could lead to correction in global commodities prices. USA continues to see weakening economy and debt ceiling issues. However, the long-term exports outlook is extremely bright for India, considering a smaller base and steps taken by the government to induce Indian exports – Production Linked Incentive (PLI) and Free Trade Agreements (FTAs).
How do you see valuations across market capitalization?
On a year-to-date basis, Nifty50 Index has underperformed most global indices, with index registering gains of 1-2%. Consequently, valuations have corrected with most indices now getting in to comfort zone. Amongst various market capitalisation levels both midcap index and small cap index are trading at discount to last 5-year average valuations.
Which sectors do you recommend?
Currently, we prefer domestic stories over the export-oriented ones given the uncertainty in global growth outlook. In the domestic space, we are positive on 3Cs – Consumer, Capex and Credit.
On the consumer space, we are seeing benefits of lower input cost translating into margin improvements across staples as well as consumer discretionary. While urban demand has been robust, there are initial signs of recovery in rural India, though we will be watching out the spread and timing of the monsoons.
On the Capex side, we are seeing a confluence of factors coming together which makes us believe that capex cycle can be sustained in the medium term. We are seeing positive triggers coming from 1) government expenditure; 2) revival in private capex; 3) PLI led manufacturing renaissance; and 4) China + 1 sourcing strategy adopted by global players.
Lastly, as the two engines of consumption and investment deliver, this could lead to robust credit growth. Additionally, we see the banks in the best of health they have been historically along with credit cost likely to be sustained at lower end.
Which category of funds should distributors recommend to their clients in current markets and why?
As per current markets, Nifty 50 trades at 10-year average valuation and Nifty Small Cap and Nifty Mid Cap is trading at discount to their 5-year average valuation multiple. Small cap funds and mid cap funds may be more volatile compared to large cap funds but could give better returns in long term, hence, suitable for investors who have long term horizon and higher risk appetite.
Investor with moderate risk appetite can look for multi cap funds and low risk appetite can look for large cap funds.
