Daily Voice: This CIO sees earnings improvement in 3 sectors if monsoon sets in as projected

It’s a fact that foreign institutional investors (FIIs) continue their selling spree, marking the fifth consecutive week ending on May 17. However, it is also important to understand that sustained FII selling has nothing to do with uncertainty relating to the election results. It has more to do with the relative valuations of stock markets and the sharp differences in recent market performance.

During the one month from April 11 to May 11, the Indian stock market underperformed. While the S&P 500 and Stoxx 50 appreciated 1.04 percent and 1.07 percent respectively during this period, Nifty fell by 2.06 percent. Significant outperformance was registered by the Shanghai Composite and Hang Seng indexes.

The Chinese stock market had hugely underperformed other markets for many years. Last one month witnessed a reversal of this long-term trend. The Shanghai and Hang Seng markets are outperforming, and this has brought investors back to Chinese shares. FIIs have been selling in expensive emerging markets like India and buying cheap Chinese stocks. They are, in a way, de-risking themselves by moving from high-value markets to markets where they seem to find higher opportunities for growth at an affordable price.

Do you see an earnings upgrade possibility in rural-focused themes?

If predictions of an above-average monsoon this year pan out, it will help agricultural output and support rural income. The market is expecting a bounce back in rural demand from a good monsoon. Stocks of Indian firms that earn a large chunk of their revenues from the nation’s hinterland are showing signs of a revival, as traders bet that bountiful monsoon rains will lead to better crop yields and boost rural demand.

We are seeing motorcycle manufacturers, farm-equipment makers and producers of fast-moving consumer goods have rallied following forecasts of timely and above-normal monsoon rains in 2024 have come from Indian Met Department and Skymet, after extreme and unseasonal heat wreaked havoc on Indian agriculture in the last two years. Sales volumes in rural areas are improving and several major consumer goods firms have predicted stronger business ahead.

Therefore, we see possibility of earnings upgrade in rural focussed themes if the underlying conditions like the bountiful geographically well-dispersed monsoon are fulfilled.

Are you bullish on the entire real estate space and ancillaries or you want to be selective (any particular segment)?

In FY24, the Nifty Realty index emerged as the top-performing sectoral index, recording a fabulous return of 132 percent. The majority of stocks within the index experienced significant growth over the last financial year.

Historically, real estate has remained a favoured investment avenue in India, attracting a significant portion of household savings. With the country's economy growing, the expanding middle class is experiencing increased disposable income, consequently driving up the demand for residential properties. According to the Wealth Report 2024 by global consultancy Knight Frank, the number of ultra-high-net-worth individuals (with a net worth of over US$ 30 million) is projected to increase from 13,263 in 2023 to 19,908 by 2028. This projection signifies an anticipated increase in investments flowing into the Indian real estate market.

There is a demographic shift towards a more affluent lifestyle, which is fuelling the desire for luxury homes, offering amenities and comforts beyond those found in conventional housing. Apart from this, the Governments emphasis on bringing a wider segment of the society under PM Awas Yojana and extending some benefits into affordable housing schemes is expected to bring a great impetus towards growth of the broader real estate sector including the ancillaries.

Do you see a big change in policies post general elections results?

The market always expects continuity in pro-business policies and reforms pursued by the ruling Government. Being a market participant we are also aligned to that school of thought. From publicly available information, we understand that whilst the election process is on, the government officials are already working on the next government's key focus areas and first 100 days plan of action.

So, we can see further step up in pro-economic development and growth policies and speed of reforms to continue unless there is a huge setback from results leading to a formation of a not-so-strong government at the Centre which can slow down the pace of economic reforms and policy implementation.

What is your view on the March quarter earnings season and what do you see for Q1FY25 earnings?

The March quarter has seen a slowdown in the topline growth across sectors as the nominal growth has moderated last year and cooling off from inflation. Sectors like automobiles, capital goods and pharma sectors have witnessed gross margin improvement due to lower input costs, thus helping to build stronger bottom-line growth. Sectors linked to the global economy and export-oriented companies have seen a continuing slowdown, especially IT and chemicals. In some sectors like consumer staples the volume growth has been weak, in low single digit, due to slow recovery in rural consumption. Real estate, hotels, travel and tourism sector continue to do well.

The resurgence of manufacturing activity in China and their dumping of the surplus inventory can dampen the growth and earnings of chemical sector. The commodity related tailwinds so far faced by manufacturing sector would start ceasing soon; BFSI sector would continue to do well, and external facing sectors may continue to slog. If the monsoon sets in as projected then we can see recovery in rural sector and thus improvement in FMCG, tractor, two-wheeler sales going forward. Overall, as the economic fundamentals look strong, we can expect markets to perform well at a broader level.

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.