Is growth the new value? Top fund manager’s take on investing, portfolio must-haves at all-time highs

The recent surge to record highs isn't merely a result of pre-election momentum; it's indicative of a more sustainable trend.

Dalal Street’s dream run continues unabated with benchmark indexes consistently hitting new all-time highs. Sectors such as metals and realty have been the cynosure of all eyes, but the Nifty Bank index has also managed to scale new highs after its recent underperformance.

While the global market trajectory hinges on the much-awaited pivot by the US Federal Reserve, India finds itself in a Goldilocks position. The domestic narrative is as strong as ever, supported by growth and moderating inflation.

Could global factors play spoilsport in case the Fed doesn’t oblige with a rate cut in the first half of CY24?

In an interview with Moneycontrol, Sunil Subramaniam, MD and CEO of Sundaram Mutual, acknowledges that while delayed rate cuts and fluctuating crude oil prices may induce short-term volatility, a significant correction or major downturn is unlikely. Edited excerpts:

Would you call this a pre-election rally? How much more upside do you see from here?

The pre-election rally started in December after the assembly election results, when we saw nearly Rs 70,000 crore of FII inflows. It seems the early investors entered the market at that point. Subsequently, I think the flows will keep coming in.

However, it appears that much of the impact of the election results was factored in quite early. What you're seeing now is more of a reinforcement of the India story coming in through the Indian economic narrative, supported by indicators such as tax collections, GST and GDP growth figures.

So, the economic story of India, coupled with the government's persistent focus on capital expenditure and infrastructure development even during the pre-election period, seems to inspire confidence. This suggests that the government remains committed to its developmental agenda without diverting attention towards consumption-driven strategies.

So, long-term FII money will sustain its flow. Moreover, domestic investors are increasingly favouring the equity market over traditional bank deposits, particularly evident in the post-Covid period. The significant shift towards mutual funds, particularly through SIP investments, has provided considerable buying support.

Also Read: All eyes are on mutual fund stress test No. 2; here's what to expect

Despite short-term fluctuations and concerns such as those raised by SEBI (Securities and Exchange Board of India) regarding small and mid-cap stocks, any corrections have been swiftly met with buying support. This indicates a continuous flow of capital from both foreign and domestic sources. So, to treat this as just a pre-election rally would not be right. I think this is a sustainable rally.

Can global factors play spoilsport?

Short-term hedge funds often make decisions regarding oil prices. The unexpected rise to $95 a barrel caught many off-guard, particularly considering that oil futures had been indicating stability around $80 for the past six months. This sudden increase may prompt these hedge funds to speculate on whether the US will intervene to prevent oil prices from surpassing $100 by increasing supply or taking other measures.

While the jump from $80 to $95 surprised traders outside India, it may lead to some profit booking. However, just to re-iterate, there is substantial buying power from long-term capital flows, including sovereign wealth funds, domestic mutual funds and institutions, which could mitigate any potential downturn. Although volatility may result from oil price fluctuations and the possible delay of a Fed rate cut this year, it's unlikely to cause a significant correction or disrupt the market drastically.

Additionally, higher interest rates in the US could impact flows into emerging markets, as investors may prefer to keep their funds in the US. Nevertheless, this is more likely to contribute to volatility rather than trigger a severe market downturn.

Also Read: Morgan Stanley keeps 'moderate' outlook for IT services in Q4, touts weakness in US

What is the outlook on the IT sector as Q4 earnings season kicks off? Should one play this theme via midcaps?

Not necessarily. I would still say that because IT still forms a significant part of the index, and passive investors would continue to increase their IT allocation. Therefore, IT should be regarded as a safety component in every portfolio.

In this context, focusing on large-cap IT names would be advisable as they would serve as a cushion (against volatility) in the event of an IT sector rebound in the coming quarters. As far as midcap IT stocks are concerned, their valuations are relatively on the higher side at present. So, my advice would be to stick to large-cap IT names from a defensive, safety-oriented component of your portfolio.

Will private banks take the lead after their underperformance?

Looking at the medium term, I am fairly bullish and positive. But in the short term, I feel private banks are not great corporate lenders and the next wave of lending will be predominantly driven by corporate demand. The Reserve Bank of India (RBI) has also expressed concerns about retail lending, signalling caution in that area.

Retail lending is highly competitive, and with increasing risk weightages, deposit growth is likely to come at a slightly higher cost. Consequently, I don't foresee significant net interest margin (NIM) expansions in the near future.

From this perspective, I favour good quality PSU banks with a strong CASA (current and savings accounts) base, which can effectively engage in corporate lending. Over the next six to 12 months, as private sector capex increases, lending activities are expected to pick up.

PSU banks have an advantage in this regard due to their willingness to take on slightly higher risks when lending to medium-sized corporates. While private sector banks maintain high credit quality standards, they may lag in immediate NIM expansion and growth.

It's crucial to note that PSU banks may accumulate NPAs faster than private sector banks. Therefore, caution is warranted, and PSU banks with robust lending practices and processes should be preferred. Alongside this, good quality private sector banks should remain part of a portfolio for their safety and continuity of earnings stream. However, don't anticipate significant margin or NIM expansions from them in the near term.

So, to answer your question, while PSU banks are positioned for growth in the medium term, private sector banks remain essential for portfolio stability, given their significant presence in large-cap indices and continuous passive flows from abroad. I would say, do not ignore private banks but at the same time don’t expect them to become the growth sector of the rally in the immediate future.

Also Read: Can real estate continue to scale new highs?

Thoughts on the realty pack that has been the best performer of FY24? And have valuations entered the uncomfortable zone?

The good news is already in the price. There's a greater probability of negative surprises versus positive surprises. So, I would say book profits if you are making good gains. It might be prudent to hold off and wait for the earnings before taking a call on fresh investment decisions.

When the markets are at all-time highs, should one look for value or look at growth investing for superior returns?

The growth in the markets has been on value. The money you've earned has come from the appreciation of value stocks. Hence, it's pertinent to say that growth has now become the new value.

The prices of growth stocks may not fully reflect the potential upside surprises that’s true for growth sectors. But in the case of value stocks, there's often a catch-up narrative, and we've likely witnessed that already. Unless growth stocks go up, the gap between value and growth will remain narrow. Today, there seems to be very little gap between value and growth stocks in terms of price.

Therefore, I would say focus on growth stocks now. There's a higher likelihood of positive surprise, both in terms of prices and your portfolio. I would say look at the domestic economy growth and what is related to that. So, industrials, building materials, housing, real estate, discretionary consumption and banks are likely to offer promising opportunities in the current market environment.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.