Although October witnessed a positive trend in consumer sales, government capex continues to be sluggish, particularly after the weak performance in Q1 and Q2, according to Shailendra Kumar of Narnolia Financial Services. Consequently, Kumar anticipates a muted Q3FY25.
After interest rate cuts in the second consecutive meeting, he anticipates a moderation in the pace of Fed rate cuts. "Persistent high fiscal deficits and debt levels in the US and other major economies render them susceptible to inflationary pressures, he reasoned.
According to the Chief Investment Officer, the market is expected to consolidate and trade within a range for the remainder of the fiscal year, avoiding significant upward momentum.
Given the elevated valuations, Narnolia has maintained a cautious stance on defense stocks since the middle of the year. In contrast, other PSU sectors like banking, housing finance, and refining presents multiple promising investment opportunities, said Shailendra Kumar has more than two decades of experience in the fund management & investment advisory.
Are the defense and PSUs still looking expensive even after the recent correction?
Given the elevated valuations, we've maintained a cautious stance on defense stocks since the middle of the year. Despite strong order books, the extended execution timelines for many of these companies translate to slower earnings growth. Additionally, once the recent surge in orders is fulfilled, a potential decline in projects could further impact earnings. To navigate this landscape, it's prudent to focus on companies with shorter execution cycles and a significant maintenance capex component.
In contrast, other PSU sectors like banking, housing finance, and refining presents multiple promising investment opportunities.
Do you see a possibility of manufacturing shifting from China to India post Trump’s win?
The bipartisan consensus on supply chain de-risking among Western nations suggests that the US election outcome anyway would not have altered this China to India trajectory. Nevertheless, Trump's occasional isolationist stance could potentially influence immigration and export policies, affecting many countries. While this shift may present opportunities for Indian manufacturers, it's crucial to closely observe the evolution of US policies to assess their potential impact.
Do you see any risks for India after Trump’s win in the US elections?
Trump’s win in the US election in an overall sense is very positive for India. Trump's prioritization of US domestic development and a non-interfering foreign policy is well-suited to India's current stage of economic and geopolitical development. This approach contrasts with the recent rise of non-elected, non-governmental power centers, which often prioritize ideology over pragmatism.
A transactional approach to geopolitics, where nations engage with each other based on mutual interests, is more conducive to the growth of developing economies like India. While some segments of the Indian economy may require adjustments due to potential tariff or immigration changes, the broader benefits of this policy shift, such as increased economic opportunities and geopolitical stability, could outweigh these short-term challenges.
Are you concerned about the December quarter earnings after weak September quarter numbers?
Given the negative management commentary during the Q1FY25 results, we anticipated weaker Q2FY25 performance. Although October witnessed a positive trend in consumer sales, government capex continues to be sluggish, particularly after the weak performance in Q1 and Q2. Consequently, we anticipate a muted Q3FY25. We expect a significant growth rebound only from mid-Q4FY25 onwards.
Do you see a revival in urban demand in the second half of FY25? What is your take on rural demand?
Consumer demand is displaying a nuanced pattern. While certain segments, such as air conditioners, refrigerators, and washing machines, have experienced substantial growth, others, like groceries, have remained tepid. Retail companies have reported a wide range of performance, with some achieving impressive growth rates exceeding 30 percent, while others struggle to maintain even double-digit growth.
The motorcycle market is also witnessing a divergence, with strong demand for 125cc feature-rich models and weak demand for 150cc base models. While we expect urban demand to recover during 2025, a more granular examination of consumer behaviour, considering factors like household income and demographics, will be essential for understanding future trends.
Do you foresee a slowdown in the pace of Fed rate cuts?
We anticipate a moderation in the pace of Fed rate cuts. Persistent high fiscal deficits and debt levels in the US and other major economies render them susceptible to inflationary pressures. The Trump 2.0 government's approach to fiscal sustainability will significantly influence the aggressiveness of future rate cuts.
Will the equity markets find it difficult to return to record highs by the end of March 2025?
We anticipate a 4-6 month period of price and time correction in the Indian market. Historically, Indian markets have experienced at least three 10 percent+ corrections every two years, but this has occurred only once in the past two years, suggesting over-extension. Additionally, earnings estimates for the Nifty have been downgraded for the past two quarters, driven by revenue and margin misses. The market needs to adjust to these short-term realities. Given the recent high valuations, a price and time correction is necessary to align the valuations with earnings expectations. We expect the market to consolidate and trade within a range for the remainder of the fiscal year, avoiding significant upward momentum.
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