Daily Voice | HSBC AMC's Kailash Kulkarni expects market to carry growth momentum into FY25 as well

The Indian economy has shown strong growth momentum over the past few years. With ongoing government reforms focusing on infrastructure development and bolstering manufacturing in India, coupled with steady investments from FII and domestic institutional investors due to strong earnings growth, the outlook remains promising.

Looking ahead into 2024, we expect the robust growth trajectory witnessed in the Indian equity markets to continue.

While intermittent volatility may surface, the overall trend points towards sustained growth. India continues to present a compelling story, offering investors the potential for wealth creation over the years.

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Do you see any major challenges for the market in FY25?

In our view, the global macro environment remains challenging with heightened geo-political and economic uncertainties. However, with inflation now under control, it has opened doors for potential interest rate cuts by the US Federal going forward.

India’s growth story has continued to remain robust with a GDP growth of 7.6 percent in Q2FY24, fuelled by strong government spending and increased investments in manufacturing and construction. The 2024 interim budget has re-affirmed the government’s commitment to infrastructure development. At the same time, efforts to reduce the fiscal deficit are expected to contribute to a favourable domestic rate environment.

Most experts expect the US Fed to cut rates cut either in June or in third quarter of current calendar year. What do you think?

At its January meeting, the US Federal Reserve left the target range for the federal funds rate unchanged at 5.25-5.5 percent, as widely anticipated. In a substantially changed statement, the Fed noted that “risks to achieving its employment and inflation goals are moving into better balance” but that it remains “highly attentive to inflation risks”.

While the Fed views policy as now being data dependent, the committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.

In line with this, the Fed has given indication that a March rate cut is unlikely but also noted that it is likely to be appropriate for the Fed to begin easing policy at some point this year.

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Do you think the RBI will start cutting repo rate only after general elections and change the policy stance in April?

The RBI’s decision on policy rates is typically driven by inflation and economic growth data. As anticipated, RBI has kept the policy repo rate unchanged at 6.5 percent, while retaining inflation forecast for FY2024 at 5.4 percent and estimate for FY2025 at 4.5 percent.

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While providing clarity on the policy stance, the governor reiterated that the stance is in terms of interest rates and should be looked at in the context of incomplete transmission and inflation remaining above the target of 4 percent. The RBI noted the progress in bringing down inflation and mentioned that the continued drop in core inflation was reflective of the impact of past monetary policy actions.

However, it noted that uncertainties in food inflation could add to generalised price pressures and interrupt the ongoing disinflationary process. As expected, the RBI has tried to strike a balance with the policy, however, it was interesting to note that one of the MPC members voted for a rate cut.

China is the big underperformer. Do you expect the world's second-largest economy to recover in the next financial year?

There is an underperformance of China, where sentiment is tepid – despite positive profit growth – prompting Chinese authorities last week to signal new efforts to stabilise confidence and revive equity prices. In China, the mixed Official PMI readings continued to indicate weak sentiment. The manufacturing PMI edged up to 49.2 in January but remained in contraction territory for the fourth successive month.

The non-manufacturing index rose to 50.7 from the previous month’s 50.4, slightly above market consensus with a rebound in services activity gauges. Chinese equities dropped amid ongoing worries over geopolitical developments and China’s macro-outlook. Macro uncertainties, geopolitics, margin erosion, and earnings downgrades remain key risks, but more policy rollouts in China are likely to sustain growth momentum and less aggressive tightening by central bank may offer some support.

Do you think digitalisation, automation and infra are big investment themes now?

I believe digital transformation and automation offer tremendous opportunities and is a strong need across all sectors. The new technologies are reshaping products and profoundly altering business, work, and our life in general.

The latest advances in artificial intelligence (AI) and related innovations are expanding the frontiers of the digital revolution. The accelerated adoption of digital technologies post the pandemic has not only transformed business models but also created new opportunities for innovation and growth.

On infrastructure spending, strong government thrust is clearly supporting the economy and has been one of the big positive contributors to H1FY24 GDP growth.

What is your strategy for HSBC Multi Asset Allocation Fund and how are you different from other such products?

In the HSBC Multi Asset Allocation Fund, the allocation of equity, debt, gold and silver ETFs is carefully determined to create a well-balanced portfolio that aims to have lower volatility compared to other standalone equity investment options. Backed by rigorous research, our focus will be on delivering relative value using a combination of top-down and bottom-up approach, ensuring prudent diversification.

Which are the best themes that are on your radar?

There is a long-term positive outlook for key sectors like manufacturing, infrastructure, power and financials fuelled by initiatives such as Make in India and rising discretionary consumption trends. Small to mid-sized companies are riding high on Infrastructure development and sustained domestic demand, propelling the success of mid and small cap funds.

Investing in good quality small and mid-cap companies has proven fruitful, signalling a compelling case for long term investing. One may consider multi-cap/flexi-caps and multi-asset allocation funds to reduce volatility, while investors with a higher risk appetite should consider small and mid-cap funds. Banking and infrastructure funds should continue to find favour along with those funds which are poised for cyclical growth of the economy.

On the fixed income side, we believe that duration funds in the three-five year range and shorter-term funds such as Ultra Short Term and Low Duration would be in focus.

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