Equity outlook: July 2024

The equity market experienced high volatility in the month with some sectors undergoing corrections following the election results.

To understand what lies ahead in the coming month, we spoke with industry experts Akash Manghani, Equity Fund Manager, Trust MF, Asit Bhandarkar, Senior Fund Manager – Equity, JM Financial MF and Meenakshi Dawar, Fund Manager – Equity Investments, Nippon India MF. Here is what they have to say on the equity market outlook for the coming month.

Aakash Manghani, Equity Fund Manager, Trust Mutual Fund

Outlook

• India is currently experiencing a mini-Goldilocks moment due to solid macroeconomic conditions, healthy corporate earnings, peaking interest rates, moderate inflation and ongoing policy momentum
• India will continue to focus on macro-stability, which is expected to anchor a bull market in stocks
• The government will prioritize infrastructure spending, affordable housing and reforms in all factors of production to boost manufacturing and remove supply-chain bottlenecks
• Over the next 1-2 years, markets will focus on earnings delivery as there is limited upside from valuations
• The broader markets (NSE500) are expected to deliver early teens earnings compounding with much higher growth expected from mid and small caps
• The immediate triggers for the markets are the budget and the earnings season for Q1FY25
• Increased support for lower-income categories and the agricultural sector may be seen and pickup in capital expenditure is key to a constructive economic outlook over the medium term
• A stronger-than-expected US economy, despite rising interest rates, is another positive trigger
• Mid and small caps are trading at higher absolute valuations compared to large caps and valuations are fair across market caps, leaving little room for absolute multiple expansion
• In the near term, markets will be driven by narratives, while in the medium to long term, earnings delivery will be the main driver

Sectors recommended

• Discretionary consumption including automobile and auto parts is expected to see significant growth
• The next five years are likely to bring a major rise in corporate capital expenditure, leading to strong order books for industrial companies
• Power and energy, electric vehicles (EVs), defence, railways, electronics manufacturing and semiconductors look promising
• The real estate sector also appears promising and a positive outlook on financial sectors such as broking, wealth and asset management and insurance

Funds recommended

• We recommend investors take exposure to flexicap funds

Asit Bhandarkar, Senior Fund Manager - Equity, JM Financial Mutual Fund

Outlook

• The market experienced a sharp uptrend after overcoming a period of uncertainty following the election results
• Broader markets have outperformed large caps, with small caps and mid caps significantly outperforming the Nifty 50 in June
• India's macroeconomic story remains robust, presenting opportunities across various segments
• The upcoming budget may provide insights into the new government's policy priorities and clarity on taxation
• The progress of the monsoon will be a crucial factor to monitor, especially given historically low reservoir levels and high food inflation
• While liquidity remains strong and valuations are high across market segments, mid caps appear to be more valued compared to large caps and small caps

Sectors recommended

• We continue to like capital goods and industrials, power and selectively, financials and discretionary consumption

Funds recommended

• Aggressive hybrid funds and flexicap funds are recommended
• Systematic investments may be good way to take exposure to small and midcap funds over next quarter

Meenakshi Dawar, Fund Manager – Equity Investments, Nippon India Mutual Fund

Outlook

• The month has been characterized by high volatility in stocks and index due to election results
• Small caps have been the performers with a 9% gain, followed by mid caps at 8% and large caps at 4%
• Automobile and media sectors outperformed while PSU banks, metals, energy and pharmaceuticals underperformed
• The investment cycle is anticipated to continue with greater private sector participation, assuming no major shifts in global dynamics and risk appetite
• Rural consumption appears well placed for recovery, supported by a low base, falling inflation and expectations of above-normal monsoons
• A mid-teen earnings improvement is possible broadly and future market performance may largely depend on earnings growth
• Market valuations are elevated from a historical perspective but earning momentum is strong with robust domestic capital inflows
• Currently, large-cap stocks with higher liquidity have higher valuation comfort compared to some small caps and major market triggers are pickup in private capital expenditure, pace of rural recovery and global growth trends
• Strong domestic capital flows have been key to market resilience and their continuation will be critical for the market

Sectors recommended

We are positive on the following segments

• Derivatives on housing capex - Building material, wire and cable
• Beneficiaries of private capex- Banks, industrial names where we have valuation comfort, proxies of Make in India
• Consumption

Funds recommended

• Larger tilt to large caps and balanced participation in mid and small cap areas, such as flexi cap are recommended