Daily Voice: Lower your expectations, says UTI AMC's Karthikraj on market returns ahead

Karthikraj Lakshmanan is the senior vice-president and fund manager for equities at UTI AMC

Investors may be better off toning down their market return expectations in ensuing 2-3 years compared to the past 4-year CAGR returns of 18-19 percent, said Karthikraj Lakshmanan, senior vice-president and fund manager for equities at UTI AMC, in an interview to Moneycontrol.

Earnings growth which has been healthy in last 4 years around 18-19% CAGR has seen some downgrades post Q2FY25 for FY25. And consensus expectations are more like early teen growth for FY26 with downgrade risk, he believes.

According to him, the valuations of large private banks are relatively attractive. "Fundamentals are largely intact and runway for growth is very long," said the chartered accountant with 17 years of experience in the equity markets and fund management.

Do you think the RBI has room for an interest rate cut in the subsequent policy meetings post December 2024?

Q2FY25 GDP growth coming at a 7-quarter low of 5.4% has raised expectations for rate cuts. However, the October 2024 CPI print at 6.21% has been highly led by food inflation though core inflation is under control below 4%. The Indian currency while has been very stable, the recent dip in Forex reserves and rupee depreciation may also have delayed the cut.

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If we exclude the pandemic period, the lowest repo rate has been 6% which provides some room for further cuts. If CPI Inflation indeed comes down to around 4% as per RBI’s expectations by Mid-FY26, then there may be little more room than the previous low as well. The bigger issue has been tighter banking system liquidity which had been easing for few months but has again dipped in recent days due to forex intervention. The 50 bps CRR cut could help ease system liquidity.

Do you believe that the market will not see more than a 10 percent gain in 2025? Do you see any threat in 2025?

It is difficult to predict how the market will perform in any given year. What we are seeing is the earnings growth which has been healthy in last 4 years around 18-19% CAGR has seen some downgrades post Q2FY25 for FY25 and consensus expectations are more like early teen growth for FY26 with downgrade risk. Considering the valuations are also higher than long term average, the room for rerating could be limited and hence investors may be better off toning down their return expectations in ensuing 2-3 years compared to the past 4-year CAGR returns of 18-19%. (Source: Bloomberg)

Is the bond market looking more attractive than equities now?

Based on long term average of the gap between bond yields and equity yields, bonds have been attractive than equities for last couple of years but still the fact remains that equities have done very well in this period as well. Bonds still look relatively attractive than equities as the gap is higher in favour of bonds.

Do you think the FIIs will take more than a couple of quarters to return to Indian equities?

If predicting markets is difficult, predicting flows is impossible as there are multiple local and global factors including sentiment which would determine the same. Talking about the past, FIIs have been adding to flows in CY24 before the sharp sell-off in last couple of months led by their selling across emerging markets. FII stake has been coming down in last few years in Indian markets and the same has been taken up by domestic institutional investors. Thus, the impact of FIIs on markets to that extent would be little lower compared to 5 years back.

In which sectors would you want to invest your hard-earned money in 2025?

Post the sharp market rerating in last few years, there are very few sectors which are cheap and attractive. However, large private banks are one space where the valuations are relatively attractive while fundamentals are largely intact and runway for growth is very long. We continue to be positive on this segment. We are also overweight on IT sector where there are some hopes of growth acceleration though valuations are no more as attractive. We are also positive on select consumption companies, mostly discretionary, on bottom-up basis where growth is in double digits or there is a turnaround.

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.