1. What are the top three tailwinds and headwinds facing equity markets going forward?
Tailwinds
Robust Underlying Fundamentals
Looking at India’s growth over the past five years, Indian businesses have strongly capitalized on structural reforms. As a matter of fact, during this period, the number of Indian companies with revenues exceeding Rs 5000 crores increased by 37%. Additionally, the number of Indian companies with net profit exceeding Rs 500 crores grew by a staggering 60% from 2018.
This is a tremendous accomplishment and demonstrates the robustness of Indian incorporations, given the delicate macroeconomics during the pandemic and the accompanying geopolitical instability.
Outperforming emerging economies show that large companies with annual revenues above $500 million not only contribute to increasing GDP and productivity but also act as catalysts for change – promoting exports, investing in job training, and paying better wages, among other things. Additionally, they are more dynamic and innovative at the adoption of new technologies.
For Indian companies, this self-cycle will result in faster and more effective earnings growth. In our opinion, India will continue to add to this basket of large size companies, which will result in stronger growth for corporate India earnings.
Visibility of Political Stability, and Favourable Policies
Given the massive state election victory, the chances of the same ruling party going forward are quite high. Thus, policies such as PLI, as promoting exports and encouraging FDI, thereby enhancing the manufacturing sector outlook going forward.
High Retail Participation, aided with increasing FPI inflows
Headwinds
• Valuations might be a little more expensive than average
• Global macroeconomic uncertainty can influence Indian markets to some extent
2. Is 2024 anticipated to be a year characterized by rate cuts, and how do you perceive the pace at which rates will decline in the US?
Fed rates are very erratic in the United States, and it is very difficult to take a call on the pace at which they will change. We continue to monitor the situation closely, and remain flexible in that regard.
While the peak of interest rates is behind us, It seems that we are in an era of higher interest rates compared to pre covid era of zero interest rates for longer time.
However, I think that India is resilient as the average inflation rate in India has always been around ~5-6% and the economic growth is expected to remain robust. Thus, India is relatively less vulnerable to external shocks.
3. There’s a viewpoint that the Small & Mid Cap segment in Indian Equities has become expensive, warranting caution until a significant correction occurs. Do you agree with this perspective, or are you more optimistic about the segment’s prospects?
By definition, any company which is beyond the 250th company by market cap is considered as a small cap company. However, one should not judge a book by its cover. Regardless of the market cap classification, the profit size of many of these companies exceeds Rs. 100 cr, which is a significant feat and goes on to show the resiliency of the company.
With that being said, we continue to remain selective in this space. We recommend using a bottom-up focus to ensure investment positions in fundamentally sound and robust companies, with high earnings quality, efficient capital allocation and great earnings growth potential.
4. Which sector or thematic trend do you believe will perform well irrespective of global risks, and uncertainties surrounding domestic elections?
We believe in one significant driver – earnings growth. Mr. Market is a mirror of the earnings growth.
We believe engineering is in an advantageous position with new growth drivers such as capex in data centers, and automation.
The auto ancillary sector is also an interesting theme. There are many companies in this sector which will benefit from the transition to EVs, enhanced safety norms, etc. The companies which are rightly positioned will be able to increase content per vehicle by 2-3x from its current level.
The consumer sector can also do well, given the rising aspirations of Indian consumers. Here, companies which will continue to innovate and remain relevant to the consumers in the dynamic market trends would be the winners.
5. How do you see sector weights change in the composition of Nifty 500 as we see approach a market capitalization of $6 trillion by the end of this decade?
The only constant is change. The average lifespan of company listed on the S&P 500 has reduced from 90 years in 1935 to 18 years today, as per a McKinsey Study. I think the world belongs to companies which can constantly innovate and adapt to the continuously changing consumer needs and keep up with the dynamism. Such companies will be rewarded by investors handsomely by giving them rich valuations.
