Even though there could be near-term pressures, Hardick Bora, Co-Head Equities at Union AMC, believes that the IT sector may be near the end of the earnings downgrade cycle.
"We continue to maintain a positive stance on five segments - automobiles, industrial/capital goods, healthcare, real estate and PSU banks," he says in an interview with Moneycontrol. He believes there is still some headroom left for them in terms of business growth and/or valuations.
Meanwhile, sectors which might witness a turnaround in FY25 are information technology, retail/QSRs, chemicals and private banks, says Bora, who has over 14 years of experience in the financial services sector.
Are you bullish on aviation sector?
Currently we are cautious on the aviation sector after the recent rally. We believe that volatile crude prices, increasing infrastructure bottlenecks and rising competitive intensity may keep earnings and valuations under pressure.
Do you expect the earnings pressure to continue in the technology space for a couple of quarters?
Even though there could be near-term pressures, we believe that the sector may be near the end of the earnings downgrade cycle. While clients have been reviewing their discretionary IT budgets, vendors have been rationalising their costs to cushion the impact of slowing revenues.
Key points to monitor for a recovery are (1) rate cut cycle by the US Federal Reserve and (2) positive outlook from IT vendors as well as clients. Developments around artificial intelligence also need to be monitored closely as they can have lasting impact on some companies.
Also read: Small-caps win FY24 fair and square. Who will ace the next round
Most of the experts feel the downside, if any, from here on, in mid-caps is limited and investors will likely use further dips to pick mid-caps. Do you agree?
We have a different opinion. We continue to believe that, on a relative basis, risk-reward for large-caps is better than that for mid-caps (as well as small-caps). So, we advise caution when deploying into the mid-cap (and small-cap) category.
Any decision to invest lump sums at current valuations must be coupled with the ability to withstand volatility and maintain an investment horizon of more than 5 years.
Instead, we advocate a staggered investment approach over 6-9 months in these segments, through systematic transfer plans (STP).
Also read: Retail investors' favourite stocks that turned multibaggers in FY24
Which are the sectors on your radar for FY25 and why?
We continue to maintain our positive stance on (1) automobiles, (2) industrial/capital goods, (3) healthcare, (4) real estate and (5) PSU banks. These sectors have performed well in FY24 and we believe there is still some headroom left for them in terms of business growth and/or valuations.
Sectors which might witness a turnaround in FY25 are (1) information technology, (2) retail/QSRs, (3) chemicals and (4) private banks.
How do you summarise FY24 with respect to equity markets and what do you forecast for FY25 along with factors on both sides?
Much like the Covid-hit FY21, FY24 too saw the full swing in the pendulum of sentiments. We started the year with acute pessimism, induced by risks around geopolitical tensions, Hindenburg report on Adani Group, bankruptcy of Silicon Valley Bank in the US and fear of higher-for-longer interest rates globally.
As most of these issues moderated, we saw momentous inflows into equities which, along with India's improving economic outlook, engendered a bull run. Based on industry data, the small-cap category has seen the most cumulative net inflows this fiscal (till February 29, 2024), which amount to about 30 percent of the category’s total AUM (assets under management) at the beginning of FY24. This exhibits the swing towards heightened optimism among investors.
However, we feel that the run-up in valuations, especially post the state election outcomes in December 2023, has sent the mid- and small-caps to an uncomfortable zone. As a result, we expect large-caps to outperform their smaller counterparts in FY25.
Do you expect strong corporate earnings for FY25 over FY24? Do you see any factors that can impact earnings growth in the next financial year?
Yes, we expect the current earnings’ momentum to continue into FY25. Key risks that could derail this trajectory are escalation of geopolitical tensions, teething issues from any major structural reforms implemented in India and slower-than-expected global economic growth due to increased protectionist trade policies.
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.
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