The actions of the US Federal Reserve have largely been on expected lines so far but persistent high wage data and job growth in the US could push the investors in pandemonium, Srikanth Subramanian, CEO at digital investment platform Kotak Cherry, shares in an interview to Moneycontrol.
He feels the trajectory that the US follows in terms of its monetary actions and now even in fiscal policies (after the downgrade) will be critical to equity markets in India.
Among sectors, banking and pharma are their top picks, says Srikanth with over two decades of experience in the equity markets. "As the structural story of India’s growth plays out, banks will continue to contribute majorly to it, while now, the trajectory for Indian pharma players looks far more promising," he says. Excerpts from the interview:
Do you expect the equity market to be rangebound for the rest of the year? Or do you expect the Nifty to end the year with 10-15 percent gains?
The Indian equity market witnessed a net outflow of $5 billion in FY23 and the Nifty delivered a return of -0.6 percent in the financial year 2023, whereas in the FY24 till July 31, 2023, we witnessed an FPI inflow of $18 billion and the Nifty has delivered a return of 13.8 percent. Clearly, Indian equity markets have been blessed with strong domestic flows and now with added flows from foreign investors, it has changed the sentiment positively and led to strong performance. There are a few factors behind such flows:
The US Fed has slowed down in terms of its rate hikes and global investors are now anticipating rate cuts. US recession concerns have subsided more or less. So, the overall gloom and doom in the financial system seems to be dying down. Markets always move ahead of the economy and the actual events.
If the rate cuts were to happen, it would mean that the cost of funds will come down and liquidity in the system will increase, which will mean an eventual expansion of activity in the global economy.
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India’s macros have held up pretty well. GST collections are at an all-time high, overall tax collections are buoyant, PMI numbers are strong- specifically, the services PMI coming in at 62 was pretty impressive, and the trajectory to fiscal deficit looks to be on track with the government’s target. Inflation has been more or less on projected lines, although the latest July numbers are higher owing to Food Inflation- first witnessed evidently in tomatoes and now with ripple effects in pulses as well.
China opened up its economy in the initial part of the year and investors globally expected the economy to rebound just like any other country in the world but that hasn’t happened at all. It’s the opposite. China saw the biggest drop in exports, manufacturing activity is at a low, and what’s new is that a deflationary trend seems to be developing in the economy.
While rampant inflation is a devil to be tamed, some amount of inflation is desirable as it is a sign of growing economic activity. A deflation would mean a spiral of degrowth, which means the already low target of 5 percent real GDP growth rate for the calendar year becomes difficult to achieve. Amid all this, India became a favourable option for investors looking to deploy the risky part of their portfolios.
India forms part of the Emerging Market portfolio from a global investor’s perspective. Allocation to Emerging Markets is highly sentiment-driven. The Nifty has delivered 9 percent return this year. For the rally to continue FPIs/ FIIs will have to keep the money flowing in the equity markets. That will only happen if the earnings continue to support the rally. A problematic quarter could completely derail the market trajectory. All of this is of course ceteris paribus on geopolitical and systemic risks globally.
Do you see any risk that may spoil the market sentiment?
A lot depends on the money flows into Indian equities. India and China are both part of Emerging Market portfolios and kind of compete with Taiwan also in the mix. Morgan Stanley recently upgraded India to overweight and keeps China on Neutral. So, the flows coming into India is also a part of the substitution strategy from global investors considering China’s overall weakness.
Now, if any major fiscal stimulus were to come from the Chinese government, the markets in China could see an immediate rebound, leading to some part of flows being diverted.
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US Fed actions have been largely on expected lines so far but persistent high wage data and job growth in the US could push the investors in pandemonium. Risk-off sentiment will kick in and portfolios will be realigned to handle possible shocks in the markets which, for sure, will mean slow or no flows and could eventually mean selling by FIIs. So the trajectory that the US follows in terms of its monetary actions and now even in Fiscal policies (after the downgrade) will be critical to equity markets in India.
The Russia-Ukraine war has seen re-intensification in the recent past. Any adverse impact there could hurt supply chains for the world, especially the food supply chain which will lead to inflationary risks elevating again, and the cycle of rate hikes will have to start again.
Lastly, on the domestic front, corporate earnings will have to match the expectations. Streets expected 25 percent EPS growth YoY in the Nifty50 and so far the results have largely been in line. Any shocks there will hurt the rally. On the macro front, food inflation will be the one to look out for as traders and analysts have already pushed their estimated timelines of possible RBI rate cuts.
Which are the two sectors that can strengthen the equity markets?
The banking sector is said to be one of the major contributors to the GDP growth in an economy like India where Gross Capital Formation, which is a derivative of credit in the economy, leads the way for economic expansion apart from the government’s fiscal expenditure. While the government expenditure is a stimulus, credit creation and asset formation is a self-sustainable model for economic growth.
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So, as the structural story of India’s growth plays out, banks will continue to contribute majorly to it. The banking sector will continue to perform well in my opinion with NIM compression happening but prudence measures on the asset quality front and operation costs front will outsize the NIM compression and ultimately have earnings growth.
Pharma stocks underperformed for the longest time and now the sector is the top-performing sector for this calendar year with the sector giving 20 percent returns in the current calendar year versus Nifty return of 9 percent. There has been consolidation in the US market and now the trajectory for Indian pharma players looks far more promising. These two sectors for me would be the top picks.
Which are the sectors on your radar to play the manufacturing theme?
With the PLI (production linked incentive) scheme anchoring the manufacturing activity in the country, the two sectors which come to mind are consumer electrical and electronics; and capital goods. Capital goods as a sector have high PEs but when the economy grows the sector generally surprises. The margins have sequentially improved and the pricing power in the sector has been demonstrated in the recent quarters.
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On the electronics front, the government has been pushing the agenda with their policy-making, a recent example being the curbs on Laptops and Tablets import to give an impetus to domestic production. This will for sure mean that brands will have to produce domestically. PLI schemes have been the real impetus for Make In India. The government is targeting to create electronic manufacturing capability of Rs 24 lakh crore by 2025-26.
Do you have any exposure to IT space? Do you think the sector has bottomed out and is looking for cue to get investors' attention?
The IT sector results started on a positive front, giving reasons to the market to rejoice. But the change in commentary over the result season spoilt the party and the IT index saw selling pressure. Overall, the results were below expectations with some green shoots. The prices of Tier-1 IT stocks have been under pressure for some time now and look attractive but what remains to be seen is the future outlook.
As per the commentary by most US banks (the largest customer for most Indian IT companies), the tech spending hasn’t been rolled back. But discretionary spending and deal closures remained under pressure. BFSI commentary not highlighting any pullback on tech spending and still the deal wins being under pressure is a paradox. One should not get attracted only by falls in prices.
In our opinion, it is better to be cautious at this point and wait for the commentary going forward. Generative AI (artificial intelligence) is expected to pick up pace in terms of requirements from clients and it remains to be seen if the IT companies can cope up in terms of capability. The impact of insourcing will have an impact on the Indian IT sector’s earnings and we will have to see how it evolves.
The pharma space has registered healthy performance recently and hit a record high. Do you see more value in the space?
As I said pharmaceutical companies have underperformed for a while now. The generics market in the US saw a tremendous level of price deterioration leading to margin pressure. Now we have seen consolidation in the market as the players have decided to exit on account of margin pressure. With consolidation happening, pricing power will return and margins will expand.
On top of it, US FDA has started inspections again and the new product rollout will happen soon. The change in product mix should be favourable and the earnings should reflect that going forward. Of course, execution will be key here so before the next run-up happens, the markets will want to see if the expectations materialize or not.
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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