1. What are the top three tailwinds and headwinds facing equity markets going forward?
Reforms of the past, along with the central government’s commitment to spur economic growth, have been positively received by the equity markets. Furthermore, the recently announced Union Budget also emphasized reducing fiscal burden and increased allocation to capital expenditure, keeping revenue expenditure in check, which buoyed the markets. At the same time, one needs to be cognizant of the potential headwinds. The anticipated soft landing in the US, the run-up to elections in the US, rising geopolitical tensions in the Middle East, or domestic earnings disappointment could all have a bearing on Indian equity markets.
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?
In the recent policy meet, the US Fed held the policy rate in a range of 5.25-5.50%, where it has remained since July 2023. Year-on-year growth in core inflation was 2.9% in December 2023, and the Committee saw good progress toward its goals, but in their view, inflation still remains “elevated”. While it seems the Fed may be cutting rates this year, they are in no hurry and are likely to be data-dependent. We expect a slow taper of Quantitative Tightening, possibly in the second half of the year.
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?
At an aggregate level, the run-up in the small and mid-cap segment has raised concerns about valuations as they are at a considerable premium versus historical averages. The heartening part is that this has been driven by earnings growth to a reasonable extent. That said, if the factored-in growth does not materialize, there is a risk to the valuations at which some stocks are trading. Having said that, this is not a uniform phenomenon across the space, and if one were to look bottom-up, we do see a few pockets where earnings growth seems sustainable and valuations are still reasonable. Based on our bottom-up research, we remain positive on select manufacturing and manufacturing allied businesses, which are found more in the small and mid-cap segments than the large-cap space.
4. Which sector or thematic trend do you believe will perform well irrespective of global risks and uncertainties surrounding domestic elections? Domestic cyclicals backed by the capex cycle
We believe GDP growth is being driven by the rising capex cycle, and high-end discretionary consumption continues to reflect in corporate results. Companies in sectors like manufacturing (metals, industrial products, and auto ancillaries) and manufacturing allied (logistics, corporate banks, and utilities), which are coming out of a tough macro cycle, have contributed to our success, and we believe this trend may continue.
From our quest to identify businesses, on a bottom-up basis, the ones that are seeing improved potential for earnings growth and ROE improvement have the below common sub-themes. These are in addition to themes already discussed above on manufacturing, manufacturing allied, and corporate banks: a) Rising Energy Intensity b) Increasing Urbanization c) Government Capex On Strategic Sectors d) Financialisation on a Sturdy Digital Backbone e) Experiential Consumption
5. How do you see sector weights change in the composition of Nifty 500 as we approach a market capitalization of $6 trillion by the end of this decade?
Earlier in the 2000s, the numero uno position in terms of sector weight was with the technology sector. As the Indian economy evolved, we have seen financial services (banks, NBFCs, capital markets, insurance) having a dominant share in the index. For a prospering economy like India, we believe financial services have the potential to be the mainstay of the index, but the composition could be decided by newer business listings.
