Daily Voice: IT, chemical sectors appear well-positioned for outperformance, says LGT Wealth's Rajesh Cheruvu

While the market is currently buoyed by several tailwinds, there are notable challenges on the horizon. Key concerns include geopolitical tensions, lofty market valuations, and lacklustre Q1 corporate earnings. These factors remain critical overhangs. Additionally, the prospect of only modest rate cuts and the uncertainty surrounding the upcoming US Presidential election could heavily influence global market dynamics. Given these conditions, it is difficult to make precise predictions about the market’s trajectory. However, investors should prepare for bouts of volatility as some level of market correction seems likely, but these corrections are expected to be relatively shallow, mainly serving to eliminate some excess market exuberance.

Will the RBI maintain the status quo on policy rates in 2024, although most experts see rate cuts from Federal Reserve?

While the Federal Reserve is expected to pivot towards cutting rates, with Fed Chairman Jerome Powell indicating that rate reductions may be on the horizon, the RBI is likely to chart a different course. Powell’s remarks suggest that if US labour market data weakens, a rate cut of up to 50 basis points could be seen. However, India’s central bank, despite the global trend towards easing, is expected to maintain its current policy stance well into late FY25.

The reason behind this divergence lies in India's relative economic resilience. Despite the global slowdown, India's growth trajectory has remained robust, giving the MPC (Monetary Policy Committee) room to maintain its cautious approach. In its recent meeting minutes, the RBI’s rate-setting panel emphasized that monetary policy needs to remain disinflationary until inflation sustainably aligns with the target rate.

Is it a better time to invest in debt funds as central banks are indicating interest rate cuts?

In the US, real rates currently stand around 250-275 basis points. With inflation easing, the Federal Reserve is expected to lower real rates to around 150 basis points, which could result in rate cuts of 100-125 basis points over a few quarters. Yields on government securities, both in the US and India, are at multi-year highs, presenting an attractive entry point for debt investors.

As central banks worldwide are likely to lower interest rates, this creates an opportunity to lock in current high yields while also benefiting from potential capital gains as bond prices rise when rates decline. Investing in debt funds during this rate-cut cycle offers a dual advantage—potential capital appreciation and stable income, all while providing diversification to a broader investment portfolio.

Are you bullish on real estate space?

In FY24, the domestic residential market saw record-breaking absorption rates, driven by a combination of low inventory levels, rising disposable incomes, and a constrained supply pipeline. These factors are likely to sustain the sector’s positive momentum in the coming years. In Tier I cities, the luxury property market has witnessed a significant surge since FY22, driven by a growing middle class with higher purchasing power, seeking premium homes that offer innovation, luxury, and convenience.

The post-Covid era has reshaped urban living preferences, with an increased focus on safety and space. This shift toward premium residential properties is expected to drive margin expansion as developers meet these evolving demands.

Which are the sectors going to outperform in coming months?

In the coming months, both the IT and Chemicals sectors appear well-positioned for outperformance.

For IT stocks, the worst may be behind. A potential US Federal Reserve rate cut could ease financial conditions, supporting client spending and improving the sector’s outlook. After facing challenges due to global uncertainties, inflation, and tightened IT budgets, we are seeing early signs of stabilization. Recent quarterly management commentaries from Indian IT companies have reflected a cautiously optimistic tone, indicating a gradual recovery.

Similarly, the Chemical sector is poised for a turnaround. Several key factors are driving this positive outlook, including reduced channel inventories, a significant drop in raw material costs, and improved margins expected from the second half of FY25. Additionally, early indicators of a rebound in global demand provide further confidence in the sector’s growth potential.

Are you adding exposure to defence space?

The defence industry is entering a golden era of indigenization and technological advancement, with a significant surge in domestic procurement as its share has risen remarkably from 54 percent in FY19 to 75 percent in FY24, and this upward trend is expected to continue.

Looking ahead, we see this momentum accelerating further. With a strong order pipeline, supportive government policies, and a major focus on domestic production, defence public sector units (PSUs) and their component suppliers are well-positioned to deliver impressive returns. The Defence Acquisition Council (DAC) recently approved capital acquisition proposals worth Rs 1.4 trillion, underscoring the sector's growth potential.

Is it the time for India to establish a Sovereign Wealth Fund?

As the nation pursues its 2047 goal of becoming a $30 trillion economy, establishing a Sovereign Wealth Fund (SWF) could be a strategic move. Such a fund could not only elevate India’s global standing but also attract significant investor interest. A SWF would be particularly beneficial for financing critical infrastructure projects, both domestically and internationally, that align with India's economic interests and those of partner countries. This could boost economic diplomacy and strengthen international partnerships.

However, there are concerns about the impact on India’s fiscal deficit, as the creation of an SWF would likely involve borrowing. This could strain the fiscal position, especially if the fund is used to invest abroad. That said, India's current financial standing, with more foreign exchange reserves than debt, offers some flexibility to explore this option without immediate fiscal stress.

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