Equity Outlook: September 2024

Indian equities experienced a decline in early August, falling from their recent all-time highs due to a global sell-off triggered by worsening US economic data and unexpected monetary tightening by the Japanese central bank. However, the Indian markets have since rebounded and reached new all-time highs, driven by strong performances in sectors like IT, pharma and FMCG.

To understand more about the current trends in the equity markets, we spoke to industry experts - George Thomas, Fund Manager – Equity at Quantum Mutual Fund, Nilay Dalal, Fund Manager – Equity at ITI Mutual Fund and Trideep Bhattacharya, President and CIO-Equities, Edelweiss Mutual Fund.

George Thomas, Fund Manager – Equity, Quantum Mutual Fund

Outlook

• The Federal Reserve rate cut is expected, however, there has also been a general slowdown in consumption in US
• It's important to closely watch demand to understand if the recent slowdown in consumption is due to temporary factors like elections or something more structural
• Regulation from the Supreme Court verdict which says that the state governments may soon have the power to impose royalties on mining companies, which could impact the metal sector
• Currently, we are cautious, though the strong fundamentals of the economy and corporate sector might help prevent a sharp correction
• Foreign investment flows will be crucial to watch as these flows could benefit the large cap stocks
• On a relative basis, large caps are more attractive compared to mid and small caps, which have seen significant price-to-earnings (P/E) expansion in recent years
• Small caps, in particular, appear stretched, making large caps relatively more appealing

Sectors recommended

• A clear value opportunity lies in private sector banks, where we might see some normalization soon
• In the IT sector, there are early signs of demand picking up
• Overall, from a sector perspective, financial banking and IT appear to be relatively stronger

Funds recommended

• Large cap funds (following value strategy) would be advisable

Nilay Dalal, Fund Manager – Equity ITI Mutual Fund

Outlook

• India is currently benefiting from favorable economic conditions, including approximately 7% GDP growth, moderating inflation, stable crude oil prices, easing 10-year government bond yields, stable currency and resilient corporate earnings
• Ongoing government initiatives such as increased capital expenditure and structural reforms, are expected to continue, along with net inflows from domestic institutional investors which will further support the growth
• However, it is important to monitor commodity prices, currency movements and central bank actions both globally and in India
• The Nifty Midcap 100 and Small Cap indices are currently trading at a 12-month forward price-to-earnings (P/E) ratio that is higher than their long-term averages
• Despite some weak earnings, markets have remained optimistic
• The better quality of corporate growth, strong cashflows and robust domestic inflows have supported this positive sentiment
• However, given the elevated market valuations, it is crucial for investors to maintain a long-term perspective

Sectors recommended

• We are optimistic about sectors like information technology, manufacturing and auto & auto ancillaries

Funds recommended

• We believe that large-cap and mid-cap categories are better positioned to handle market volatility

Trideep Bhattacharya, President and CIO-Equities, Edelweiss Mutual Fund

Outlook

• We expect the focus of Indian equities to shift from local factors, like the Indian elections in the first half of 2024 to global factors in the second half of the year
• On the earnings side, we anticipate that Indian companies will benefit from favorable conditions such as better monsoons, rural recovery and increased capital expenditure in the coming quarters
• Another factor is inflation – if it stays below the RBI’s target, it could open the door for a potential rate cut in the second half of 2025
• Additionally, stable crude oil and commodity prices would further support the economic environment
• Continued investments driven by capital expenditure, along with a commitment to fiscal discipline are likely to keep the momentum going in the Indian economy
• The liquidity in Indian equity markets remains strong with domestic inflows significantly exceeding foreign institutional investor (FII) flows, providing stability to the markets
• While large-cap valuations are about 10% above their 10-year average, mid and small-cap companies are valued 20% to 40% higher than their historical averages

Sectors Recommendation

• We expect earnings to stay strong in sectors like NBFCs, power capex-related industries and real estate
• In the last six months, we have increased our investments in IT services and the consumption sector, driven by expectations of rural recovery and hopes for global rate cuts

Funds recommended

• Flexi-cap funds are well-suited for long term investors
• For investors with moderate risk appetite, multi-cap funds offer balanced exposure across different market caps
• Mid-cap funds for investors with aggressive risk tolerance and a longer investment horizon of 5 to 10 years