Daily Voice | 2024 will be strong for equity markets if FED policy change happens, says Narnolia's Shailendra Kumar

Private banks' quarterly results declared so far have been disappointing and further suggest issues emerging in the broader financial landscape of India. Deposit growth is continuously lagging loan growth and this is not sustainable. It’s a bigger issue and needs broader policy formulation. If deposit growth remains low, it will ultimately hamper loan growth. And that will hamper economic growth.

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Though we are not anywhere near the trigger point, the issue needs to be addressed shortly. Apart from the lower deposit growth, most of the banks have reported higher costs due to digital initiatives and higher manpower costs. Also, provisioning has gone up sequentially due to higher provisioning on unsecured credit and recent regulation related to investments into AIFs. For value investors, private banks are good to invest due to attractive valuation but growth investors may still need to wait.

Do you think the worst is over for HDFC Bank? Is it still an over-owned stock in the FII basket after the past week sell-off?

With over 50 percent FII ownership, HDFC Bank's price movement has become a bit dependent on FII flows. The bank has gone through a large merger in the recent past and will take a couple of more quarters before its financial number stabilises.

In the interim, management focus has been less on the business and more on getting the merger right. Various digital initiatives taken in the recent past have not given the desired results. But now the management focus appears back on the business growth and valuation is very comfortable for investment.

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Do you think the Q4FY24 numbers will give a clear picture for technology stocks?

While order inflows for IT companies remain robust, the rate for execution has come down meaningfully. We do not expect double-digit dollar revenue growth for the next two financial years for the majority of the IT services companies. Also, there is no case for sustained growth in the margin.

At the same time, the valuation multiple for IT stocks has still not come down to levels that prevailed during 2013-17 when similar fundamental conditions existed. So, we do not see any material change to the fortune of IT stocks anytime soon. At stock-specific levels, some of the stocks that are into engineering design look good.

Should one hold or add railway stocks in portfolio given the expected increase in spending on infrastructure?

With a very sharp rally during the last 2 years, railways stocks do not look to add anymore. Stocks have gone up by 5-6 times and have largely captured the possible revenue and profit growth going forward. Spending by the Railway Ministry has been up by over 40 percent this fiscal.

Whether one should hold railway stocks after such a large rally will depend on how much allocation is made for the next financial year. If the allocation for railways capex for FY25 is announced for Rs 3 lakh crore or more, then the case for holding railway stocks will improve.

Are you bullish on hotel and travel industries?

Structurally for the long term, with rising per capita income, hotel and travel industries have a great future in India at the business level. However, the recent sharp rally in the stock prices of companies operating in this sector is due to the supply bottleneck as some capacity has gone out of business during the pandemic, and sudden demand spikes will take time to get the matching supply. Matching capacity will take 2-3 years to come up so for the next 1-2 years this sector will report strong growth.

The current valuation already has that 1-2 strong years of growth captured. So, while the sector looks bullish, we are not that bullish on the stocks at current prices. We prefer some proxies of the sector like companies providing software to this sector.

After looking at the market trend, do you see a major possibility of correction in the short term?

The year 2023 was a good one for most of the stock markets globally barring a few, such as China. The 20 percent+ return came not only in India but also in the US. Along with major geopolitical events and election outcomes during 2024, the US Fed policy stance will be key to how the market will move through 2024.

Recent statements by the US FED suggest more inclination towards an early rate cut than staying with the current ‘higher for longer’ regime. Economic and employment data remains strong and recession is not in sight but the spread between the Treasury repo market and the fed funds rate has jumped sharply, suggesting tight liquidity. This might be the reason behind the possible change in stance.

If this policy re-pivoting happens 2024 may prove another good year for the equity market across the world. Current valuation and earnings growth going forward suggest a low single digit return for the Indian market but if the FED policy change happens then 2024 will be another strong year. All in all Indian market remains a strong Buy if any correction happens.

What is the most important thing to look at in the Interim Budget scheduled to be presented on February 1?

While the fiscal deficit, changes in taxation, and capex will grab the headline; I will be tracking the initiatives towards reviving rural consumer demand very closely during the forthcoming interim budget. Growth in spending by the Ministry of Rural Development and Ministry of Agriculture has been flat to negative during FY24.

Also, this is one area that has still not recovered post-COVID times and impacts consumer sector stocks. The majority of consumer stocks have shown poor volume growth for the last 8-10 quarters and are market under-performer, any major policy boosts given to reviving consumer demands in rural India will see a change in the fortunes of consumer stocks.

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