Daily Voice | UTI AMC's Ajay Tyagi sees 2024 as year of consolidation with funds overweight on IT

Do you think 2024 will be very strong for the equity markets, considering the possible lead from frontline stocks?

While the Indian economy is certainly doing very well right now, the markets have already baked this in and consequently are trading at higher-than-average valuations. On one hand, while midcaps and smallcaps are trading at a significant premium to their long-term average, on the other, even largecaps are trading at a slight premium. This would act as an anchor to markets moving up significantly.

While we certainly feel that largecaps provide a much better risk reward at this stage compared to smallcaps and midcaps, the absolute upside would be limited here as well. Our best guess is that 2024 could be a year of consolidation.

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With the latest commentary by US Federal Reserve, are you betting big on technology stocks?

The commentary by the US Federal Reserve a few days back has certainly been taken as a big positive by the equity markets around the world. For the first time in almost two years, good news is not bad news. For instance, data around the strength in the US GDP, payrolls and services PMI were all taken negatively since it was interpreted as higher interest rates for longer duration. At the same time, the fear was that higher interest rates at some stage will damage the economy enough and force it to undergo a recession.

Against this backdrop, the news around interest rates starting to reduce from 2024 and the economy avoiding a recession as well has been taken as a big positive surprise. This is the kind of goldilocks scenario that the markets have been considering as the best case outcome, albeit with a low probability, and it seems to be playing out now.

The technology sector in India has experienced a double whammy of sorts over the last two years. First, high interest rates were damaging to the valuations as companies in this sector are considered to be high growth and high duration, thereby experiencing a higher impact on intrinsic value with rise in discount rates.

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Second, as I said, expectations were that the US economy (where majority of the business of these technology companies is) would go into a recession thereby impacting the growth prospects. With both these factors reversing now, the technology companies would certainly be favoured by the markets.

At UTI, we typically don't take a short-term view of things and we base our stock selection on factors that matter in the long run keeping the valuations in mind. For most of our funds, technology has been an overweight sector as we have been focusing on the prospects of these companies in the medium to long term rather than getting unnerved by the high-frequency economic data coming from the US. Having said that, the events of the last few days will certainly bolster our conviction on the sector.

The Fed hinted at three rate cuts in 2024. Do you expect more interest rate cuts given the US and global economic environment?

A lot will depend on the incoming economic data, particularly inflation and GDP growth. Sticky inflation would force the Fed to go slow on rate cuts while faster than expected slowdown in GDP may lead to an acceleration in cuts.

At this stage the Fed seems to be building in three rate cuts of 25 basis each amounting to a total of 75 basis points although the bond markets are already building in 150 basis points of cuts in 2024 itself. The truth could be in the middle and we don’t have a strong view on the exact quantum of rate cuts next year. However, we believe that over the next two years, we are headed to a more normalised scenario of interest rates with Fed Funds rate settling down somewhere between 2.5 to 3 percent.

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Then what is your take on the expected action from the Reserve Bank of India which is following the Fed path in terms of interest rate cuts?

The rate cuts in the US are certainly good news for RBI. While our own inflation has been well behaved but in order to defend the Indian rupee, RBI has been waiting for cues from across the globe to reduce interest rates. We feel that RBI could start affecting rate cuts sometime next year as Fed start to loosen.

Do you think the PSU stocks are now a growth play?

PSUs represent a broad canvas in India across multiple industries and sectors, so it's not appropriate to paint them in the same brush.

The one sector where we feel that PSUs will witness strong growth is the defence sector. This is on account of the government pushing for more of indigenous manufacturing and the strong positioning that PSUs enjoy here versus the private sector which is just about getting its feet wet.

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However, the same is not true in the other sectors. In banking and financial services, power utilities, metals and mining etc, companies from the private sector could provide better growth and profitability outcomes versus the PSU sector over the medium to long term.

Do you expect the primary market to be robust in 2024, considering the possible optimism in the secondary market?

The primary markets have been strongest ever in 2023. The amount of money raised by IPOs, QIPs and placements by existing shareholders has been extremely strong this year. We feel that 2024 should be strong as well.

In particular, we should witness a resurgence of tech related IPOs which had build momentum in 2021 but went into a slumber in 2022 and 2023 to hopefully regain strength in 2024.

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