Daily Voice: Aviva India CIO believes high frequency indicators supporting forecast of better economic growth in Q4FY25

Balamurugan Shanmugam is the Chief Investment Officer of Aviva India

With the recent correction in the market, "we are around the long-term average for valuations on the large cap while the midcaps still trade at a premium," Balamurugan Shanmugam, the Chief Investment Officer at Aviva India said in an interview with Moneycontrol.

According to him, high-frequency indicators are supporting the forecast of better economic growth in the Q4FY25 and this should also be reflected in the earnings of the listed companies in India.

He looks for opportunities in themes like discretionary consumption that offers reasonable visibility of demand, and sectors of government priority like power and allied sectors. Balamurugan has 30 years of diverse experience in the BFSI space.

Do you think the market is currently worried about global growth, even though most experts believe it is close to the bottom? Are there any other factors that could delay a market recovery?

Equity markets are swayed by sentiments and liquidity in the short term but are aligned to the earnings in the long term. Growth in India faced some cyclical moderation which was also reflected in the corporate earnings of the past few quarters. However, both the central government and the RBI have taken pro-active measures to address the concerns.

Our economy is largely domestic facing and hence rub-off from any global growth concerns should be limited. There are concerns about US growth getting affected due to various policies being pursued there around fiscal tightening due to what DOGE seems to be doing and tariffs becoming inflationary and, hence affecting consumption. While time will tell the actual impact, Europe and China seem to be embarking on an expansionary path.

Since the starting valuations were high, particularly in the mid- and small-cap space, with the recent correction in the market, we are around the long-term average for valuations on the large-cap while the mid-caps still trade at a premium. High-frequency indicators are supporting the forecast of better growth in Q4FY25, and this should also be reflected in the earnings of the listed companies in India.

What could be the potential trigger for a 'U-turn' in the equity market? Would a reversal in FII outflows be one?

Since the long-term returns from the market tend to be close to the nominal GDP growth rate and since we are coming off from peak valuations, the return expectations should be calibrated accordingly. The domestic liquidity driven by the increasing propensity of households to invest rather than save has been acting as a support to the valuations and hence the market. With the FIIs relentlessly selling, even the high level of domestic fund flow could not stop the market from aligning the price levels.

In a way, this is good for the long-term health of the market. Since the other global markets are offering better value propositions, global money tends to move there. The US growth moderation and their own high level of valuations may provide some reprieve from the funds flowing into the US form other markets. Though it is not anticipated that FII flow will turn meaningfully positive immediately, with our market correction we may see some balance returning.

Do you expect further correction in the IT sector, which has already lost 20% from its record high?

This is an externally facing sector and not homogenous in terms of end consumer segments and geographies. With expected tightness in US discretionary spending but higher spending expected from Europe, prospects for companies in this sector could be varied. Large-cap names had anaemic revenue growth in the recent past pinning hopes on US Fed rate cuts spurring demand. Now that seems a shallow one and with sentiments turning cautious in the US in the last few weeks, it is difficult to call this sector broadly but there could be opportunities within the sector.

Where would you place your bets (among sectors) during this severe correction across market caps?

Our investment philosophy is to look for growth in our investee companies at reasonable valuations. IRDAI Investment Regulations also guide us towards prudence by specifying Issuer, sector, and group-level exposure limits. Many sectors that faced competitive intensity but still have growth visibility faced weakened pricing power and have corrected. We look for opportunities there. Themes like discretionary consumption that offer reasonable visibility of demand, and sectors of government priority like Power and allied sectors could be other areas of interest.