Despite persistent foreign investor selling and diminishing prospects of an early rate cut by the US Federal Reserve, the Indian equity market continues its record-breaking streak. Amid tensions in the Red Sea, a bullish sentiment prevails, with the Nifty consistently achieving new highs.
However, analysts caution against stretched valuations and emerging frothiness in certain segments. In an interview with Moneycontrol, Sandeep Bagla, CEO of TRUST Mutual Fund, suggested that the current market rally is momentum-driven, with the short- to medium-term trend poised for a further upside. Edited excerpts:
What are the key risks to the Indian equity rally?
There are multiple risks on the horizon. Firstly, there's an issue in the Red Sea, alongside concerns regarding costs. Additionally, there's speculation about central banks considering cuts, although historical precedent doesn't clearly indicate such action during market peaks. Also, equity markets do not seem to be factoring in a potential recession or slowdown. What we can expect is a modest adjustment in interest rates from central banks rather than outright cuts or the initiation of a cutting cycle. Hence, expectations from central banks shouldn't be overly optimistic.
Valuations stand out as a significant risk factor. Presently, the market is in an extremely bullish phase, reaching new highs with elevated valuations. Consequently, there's little room for error. Market sentiment already anticipates high growth rates, so any deviation from these expectations could disappoint in the short to medium term. Nevertheless, momentum remains robust in the immediate short term. Global central banks have been printing money. Notably, the G4 central banks have injected approximately $21 trillion into the economy, flowing into sectors with perceived cheap valuations or high growth potential.
Moreover, India's growth narrative, coupled with economic and political stability, attracts internal investment flows, further driving market performance. Thus, the current market dynamic appears more momentum-driven than grounded in compelling investment cases.
Is Indian IT poised to benefit from the AI wave?
Certainly, Indian IT stands to gain. Over the past 25 years, Indian IT has thrived on major technological advancements... Indian IT firms have demonstrated agility and adeptness in execution. It remains to be seen whether we can transform ourselves to delivering products of quality which the Western world can deliver.
Today, we are sitting in India and all Indians are paying money to American companies without realising it. We are paying money to Apple, Amazon, Google, Microsoft, Uber and the like. So, they have delivered products which can take money from the Indian consumer. I don't think in India, IT companies have that kind of wherewithal that we can come out with a product that can take money out of American wallets. While Indian IT firms are poised for long-term success, bridging this gap remains a journey. Nonetheless, any benefits accrued in the IT sector globally are likely to trickle down to Indian IT companies.
What is the view on FMCG amid the slowdown in volume growth and patchy rural recovery?
The cities are doing well. The rural economy is not picking up to that extent. The economy will do what it will do. It is the markets which have to balance it out. The markets are more bullish than the economy in the hope that the recovery will happen in the future. So, probably one could be underweight in sectors where the recovery is yet to come and there are no signs of immediate recovery on the cards. So, one could remain slightly underweight on FMCG.
Also Read: Explained: Are PSU stocks rising on fundamentals, or only on momentum?
Where are public sector unit (PSU) stocks headed after the stellar run?
The market outlook appears highly optimistic regarding order inflows, particularly for PSU companies. Previously, there were concerns regarding government intervention, capital allocation, and agility within PSU firms. However, these perceptions seem to be getting cleared, paving the way for increased valuations and multiples. So that story can go on for some more time till we get proper evidence, backed by actual numbers, on whether or not the re-rating has been worthwhile.
Sectors such as railways and defence, known for their long-term prospects, demand a patient, medium-to-long-term perspective. With significant influxes of capital into the Indian markets, valuations are trending upwards. Those considering investment in these sectors should think long term and view it more as a marathon than a 100-metre sprint. So, PSUs are poised to do well in the long run but for the short to medium term, it could be anyone’s call.
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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