Daily Voice: 'Keep an eye on these 2 important sectors that lagged behind in current rally'

In light of the recent geopolitical tensions in the Middle East, market concerns have led to a limited correction in Equities over the past month. However, it seems that the market has not fully factored in the serious nature of this conflict. While at present, Iran’s attack and the subsequent Israeli response is being seen more as geo-political maneuvering than as any attempt in getting into a direct confrontation, but one can never be sure of these things.

Uncertainty still looms regarding the current situation in the Middle East, and the markets shall watch the unfolding events keenly. While we remain hopeful for a de-escalation, domestic political pressures in both nations could exacerbate tensions. The other worry facing the world today is the Fed’s stance towards its monetary policy in the wake of sticky inflation. While these global fears persist, the strong domestic factors are having a strong bearing on the active interest that we see in Indian Equities.

Is this the right opportunity to buy or should one wait for some more fall?

With the broadbased stock market rally behind us, the market movements shall become more stock specific.

With a medium-term investment horizon of 3-4 years, we are quite confident that the markets still offer attractive returns opportunity as the macro factors support robust growth. This is a year, where increased market volatility shall give opportunities to the investors to enter the market and therefore one should deploy the money in a staggered and systematic manner, rather than through a lump sum investment at a single point in time.

Where do you like to deploy your money in this fall?

Considering the current valuations, it is recommended that investors prioritise individual stock selection over broad sectoral allocation. Investments should be directed towards companies with strong fundamentals and strong earnings growth. There are many sectors which look quite attractive over the next few years.

For instance, Engineering, Capital Goods, Metals etc. are going to benefit from the Capex Cycle; or sectors like Infrastructure, Cement, Logistics are benefiting from the government’s robust capital expenditure plans. Even discretionary sectors like auto, travel & tourism, entertainment, fashion etc., are likely beneficiaries of the strong economic growth. Some of the sectors have lagged behind in the current rally such as IT and FMCG. Any uptick in demand in these shall have a rerating effect and therefore should be watched. Having said that, investors should be mindful of the valuations while investing as many stocks look fully priced right now.

Should one still avoid FMCG plays, though there is hope for above normal monsoon?

FMCG companies witnessed limited participation in last year's rally due to sluggish volume growth and subdued rural demand. This can be attributed to various factors such as high inflation, unpredictable and insufficient monsoon, and reduced employment opportunities resulting in lower disposable income.

While an above-normal monsoon is expected to spur some growth, there hasn't been any significant indication of any near term demand improvement. Nonetheless, companies within the sector offering attractive valuations may warrant consideration over making sector-wide decisions.

Do you see significant growth in brokerage and asset management companies?

Following the COVID-19 pandemic, there has been a notable surge in public engagement with equities, evidenced by the rising number of demat accounts, growing Assets Under Management (AUM) (50 lakh crore) in mutual funds, and a substantial increase in Systematic Investment Plan (SIP) book.

Brokerage firms and Asset Management Companies (AMCs) stand to directly benefit from this trend of financialization of savings, which is gaining momentum in the country. These companies still have considerable room for growth considering that still majority wealth of Indians is in Real Estate, Gold, FDs and insurance. Also, a bullish market outlook would further bolster their business prospects.

Given the likely sticky inflation, do you think Federal Reserve will go for 50 bps fed funds rate cut instead of 75 bps?

Persistent inflation and stronger-than-expected economic growth in the US have cast uncertainty on the timing and magnitude of potential rate cuts. Previously, markets had anticipated the Federal Reserve (FED) to initiate rate cuts by June, with an expectation of a 75 basis points (bps) reduction in 2024. However, we now assess that the ongoing inflationary pressures and robust labour market have heightened the likelihood of the FED maintaining rates at 5.25 percent-5.50 percent during the June meeting.

It's conceivable that rate reductions, possibly around 50 bps for the remainder of the year, may begin approximately 4-5 months from now, contingent upon the trajectory of inflation in the US.

The probability of the Reserve Bank of India (RBI) announcing a rate cut before the FED is minimal, given India's resilient economic growth and inflation, though moderating, still exceeding the RBI's 4 percent target. We anticipate the RBI to initiate any rate cuts only once a definitive shift in the FED's stance becomes visible, thereby foreseeing no rate cuts until late this year.

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.