"One sector which provides reasonable comfort in terms of valuations is the Banking & Financial Services (BFSI) space, which is currently our preferred sector," Unmesh Kulkarni, Managing Director Senior Advisor at Julius Baer India said in an interview with Moneycontrol.
While the sector has relatively underperformed due to pressure on NIMs, he believes that steady credit growth, healthy asset quality and reasonable valuations should be positive for the sector.
After Fed's move, he expects the RBI to also change course and start cutting rates, from December 2024 or February 2025. However, "we expect the rate cut cycle in India to be shallower than that in the US, as the Indian economy continues to exhibit strong growth momentum," said Unmesh, who has more than 20 years of experience in the wealth management industry.
Are you super bullish on India? Will India continue to grow at 6.5-7 percent in coming years?
The Indian economy is on a firm footing and performing relatively better than many other emerging economies. Several economic indicators have been exhibiting a positive trend – e.g., healthy business activity, strong GST collections, steady urban consumption, and lower inflation prints. A decent rainfall season in the current year should result in a recovery in rural demand as well. Corporate earnings have been encouraging.
While the Government has so far been doing the heavy lifting in capex, private capex is expected to pick up going forward, aided by a recovery in private consumption, a steady improvement in capacity utilisation, and strong support from the Government to domestic manufacturing.
India’s external situation looks comfortable - improved Current Account Deficit and healthy forex reserves. The current downtrend in oil prices augurs well for the Indian economy.
Assuming there are no major geo-political events, India’s economic momentum is likely to be sustained.
We need to however keep an eye on the evolving ‘global’ growth momentum, as there are signs of a slowdown in the US (apart from Europe). The Fed has just cut policy rates by 50bps, and the key factor to look out for now, is whether the US economy slips into a soft landing or a hard landing /recession. A sharper slowdown can have its natural spillover effects on the rest of the world, including India.
Are you positive about Indian equities?
From a medium-term investment perspective, we remain constructive on Indian equities. Despite lower participation by FPIs in Indian equities, markets have been resilient and strong, aided by healthy earnings momentum as well as robust domestic liquidity with increasing retail participation, both directly in stocks as well as indirectly through Equity Mutual Funds, PMS, and AIF schemes.
In the near term, however, there are some amber signs that need to be watched, which might lead to some weakness in the Nifty, e.g., slowing corporate earnings growth, elevated valuations, rising domestic fundraises (IPOs, FPOs) and weakening global macro.
The strong domestic flows should act as a cushion for Indian equities during steeper market corrections and volatility in foreign flows, although the start of the rate-cut cycle can lead to better FPI flows.
Do you see a series of fed funds rate cuts in upcoming policy meetings before the FOMC decides for a long pause?
The September FOMC meeting marks the beginning of a change in the rate cycle in the U.S. This 50 bps action is the first rate cut, and we expect the Fed to carry out an additional 50 bps cut before the end of this calendar year.
We also expect the Fed to continue cutting rates next year (likely 100 bps in CY 25). The extent and pace of rate cuts will be determined by the nature of the slowdown of the US economy (soft/hard landing) and the data on inflation.
Do you expect US IT spending to come back sharply given the start of the rate cut cycle? Are you overweight on technology stocks in India?
The IT sector has met with challenges over the past couple of years amid macro challenges, reduction in discretionary spends, and delays in decision making. Interestingly, however, the deal flows/pipelines have held on well.
The areas of growth such as cloud migration, digital adoption and enterprise transformation are expected to have longer cycles/duration of spends. Also, there are newer areas of growth such as Generative AI and cybersecurity, which can provide further boost to the growth opportunities.
The industry is likely to see better growth trends ahead, aided also by the recovery in the demand environment amid rate cuts. Some end-user segments such as BFSI are already seeing green shoots, with constructive commentary on tech spending from top US banks.
However, IT stocks have rallied well in the recent past, pricing into some extent the anticipated recovery in the demand environment and trading at a good premium to historical averages. We are therefore Neutral on Indian IT and will get more comfortable upon some corrections in the stocks.
Will the prospect for bond yields be favourable over the next 12 months? Are Indian government bonds an attractive investment?
Against the backdrop of a slowing global economy and falling global interest rates, we expect the RBI to also change course and start cutting rates, from December 2024 or February 2025.
CPI inflation in India has cooled off substantially and now trending within the RBI’s tolerance range of 2-4 percent, although one can argue that some part of the fall in CPI is on account of a high base effect. Core CPI is also very comfortably placed. This should provide some legroom to the RBI to cut policy rates, especially with the Fed now swinging into a rate cut cycle, joining the likes of the ECB and the Bank of England. We, however, expect the rate cut cycle in India to be shallower than that in the US, as the Indian economy continues to exhibit strong growth momentum.
The expected fall in domestic interest rates will augur well for Indian bonds - both corporate bonds and government securities. However, G-sec yields have already been on a downtrend for some time and have fallen around 80-85bps from their highs in 2023. While yields should fall further with the commencement of rate cuts, the incremental fall in long-term yields is likely to be moderate. Short-term yields, however, should now start falling, as the yield curve has been flat for quite some time.
Overall, the next one year is expected to be positive for fixed-income markets.
Your top sectoral bets in India and why?
With Indian markets doing extremely well over the past couple of years, most of the segments are currently trading at fair valuations or in the expensive zone.
One sector that provides reasonable comfort in terms of valuations is the Banking & Financial Services (BFSI) space, which is currently our preferred sector.
While the sector has relatively underperformed due to pressure on NIMs, we believe that steady credit growth, healthy asset quality, and reasonable valuations should be positive for the sector.
Apart from BFSI, we also like Consumption (including Auto), with the structural drivers already in place in the form of rising income levels, urbanization, increasing aspirations, etc. We also expect a recovery in rural demand.
We remain structurally positive in the Healthcare space with a medium-to-long-term perspective.
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