Daily Voice | Why this investment chief bets on these three sectors, sees lag in IT, FMCG for Dec quarter

Despite experiencing headwinds from global monetary tightening, particularly US Fed rate hikes, the Indian economy and its markets demonstrated remarkable resilience in 2023. While the year began with elevated inflation, geopolitical uncertainties, and FPI outflows, a gradual easing of these pressures later boosted investor sentiment.

India's strong macroeconomic fundamentals, marked by robust GDP growth, moderating inflation, and a stable rupee, played a crucial role in this resilience. This, coupled with improving global conditions like softening inflation, central bank pauses on rate hikes and continued earnings growth, led to a market rally across indices. Nifty 50 delivered a 20 percent gain, with midcap and smallcap indices delivering even higher returns.

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Looking ahead, India's economic growth is expected to remain robust in 2024, supported by domestic consumption, government spending, and a gradual recovery in private investment. While uncertainties like global interest rates, volatile crude oil prices, and upcoming domestic elections remain, the Indian growth story continues to be compelling, offering investors significant potential for wealth creation over the long term.

Q: Will you be surprised if the US 10-year treasury yield falls below 3 percent in the coming weeks?

The market seems to be betting on a Fed pivot in 2024, with expectations of three to four interest rate cuts, 75 to 100 basis points cumulatively. This anticipation has already had a significant impact, pushing the 10-year Treasury yield down from 5 percent to 3.8 percent. The possibility of US 10-year treasury yields falling below 3 percent, if the Fed cuts rates more aggressively than currently expected, or inflation falls faster than anticipated, is unlikely at this juncture. The US 10-year yield going below 3 percent in the immediate future hinges on how dovish the Fed actually gets and how quickly inflation further moderates.

Q: December FY24 quarter earnings will begin next week. What do you broadly expect from the upcoming earnings season and do you expect significant upgrades in the said earnings season?

The upcoming quarterly earnings looking quite optimistic, particularly for domestic-oriented sectors like financials, industrials, and capital goods. These sectors are expected to continue their strong growth trajectory supported by a robust economic recovery and rising domestic demand. IT services, however, which has been facing headwinds in recent quarters, is likely to see muted performance in the current quarter. This is due to a combination of factors, including a slowdown in global IT spending and increased competition from automation and outsourcing.

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The consumer goods sector, including FMCG, is also expected to see a muted growth due to relatively weaker rural demand. Despite these pockets of weakness, the overall market is expected to see healthy earnings growth. As mentioned earlier, thanks to the strong performance of the domestic-oriented sectors, as well as continued strength in certain export-driven sectors like generic pharmaceuticals. while there are a few areas of concern, the upcoming quarter is shaping up to be a positive one for earnings. Investors should keep a close eye on domestic-oriented sectors and generic pharmaceutical exporters, which are likely to be the key drivers of market performance.

Q: Do you expect the equity markets to correct if earnings fail to meet market expectations? Do you see such a possibility?

The market's future upward trajectory hinges largely on corporate earnings growth as the price-to-earnings multiples are already on the higher side. With minimal headwinds on the horizon, earnings growth driven by strong company fundamentals will be the primary factor driving stock prices. While the robust GDP recovery suggests limited downside risk to overall earnings, it's essential to remember that individual companies can still experience challenges.

Therefore, analysing earnings at the company level, alongside broader economic indicators, will provide a more enhanced understanding of the market's potential performance. The Nifty earnings growth for FY23 stood at about 12 percent, and there's an optimistic outlook with expectations of around 13-15 percent growth in both FY24 and FY25.

Q: Financial services is the sector to watch in the current calendar year?

Though the broader financial services sector performed well during 2023, the Bank Nifty itself underperformed the Nifty with gains of 12 percent during the year compared to the 20 percent returns delivered by Nifty 50. This was largely on account of the underperformance of a few large banks during the year. The underlying fundamentals of the (large private banks) sector appear attractive with credit growth of around 15 percent, benign asset quality and very strong capital adequacy. Their valuations also remain attractive compared to their historical average, suggesting ample room for future growth.

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The combination of robust fundamentals, reasonable valuations and improving economic conditions augers well for the sector and positions it for a healthy performance in the current year (2024).

Q: Do you think the government utilities space looks better than defense and railways that saw significant run-up in the past quarters?

The Indian market has witnessed a significant rally, particularly in sectors like railways and defence, which have surged due to strong order books and government spending. While these sectors did well, their valuations now seem stretched. The substantial rise in these sectors in the past couple of years has left them trading at elevated levels, making them relatively expensive compared to historical trends.

Conversely, gas utilities haven't participated much in the rally and appear relatively undervalued. The fundamental outlook for gas utilities remains robust. The increasing focus on cleaner energy sources, coupled with rising urbanization and industrialization, bodes well for the long-term demand for natural gas.

Additionally, the government's push towards gas distribution infrastructure expansion further strengthens the sector's prospects. Therefore, while railways and defense might have captured the market momentum, their stretched valuations raise concerns about further upside from current levels. Government-owned utilities, on the other hand, offer a compelling alternative. Their relative underperformance and attractive valuations, combined with strong underlying fundamentals, make them a potentially rewarding avenue for investors seeking value and long-term growth potential.

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