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Edited excerpts:
How do you expect the General Election outcome to impact the Indian stock market? Can we expect a post-election rally?
The market is forward-looking and tries to discount the future be it earnings, or major economic or political events.
Unless the outcome is significantly different from the opinion polls, it is safe to assume markets in their wisdom have discounted it.
Policymaking over the last few years has focussed on capex hence we expect more of the same as far as fiscal and legislative policy are concerned if we don’t see any change in government.
However, market participants continue to be watchful of the upcoming election results and may tend to react if the outcomes are not in line with the expectations.
Also Read: BJP manifesto 2024 promises policy continuity. What does it mean for the Indian stock market?
How do you see the inflation and rate cut trajectory from here on? Can rising geopolitical tensions harden the already sticky inflation and delay rate cuts?
Higher fiscal deficits in the US and balance sheet reduction (bond sales) by the US Fed pose headwinds to a significant decline in US long-term yields.
At the same time, positive surprises in growth as well as employment numbers suggest a low risk of any hard landing.
Both these factors have led to inflation turning out to be more sticky in the US.
The rate cut expectation in the US has moved in a wide range from close to 150 bps at the start of the year to less than 75 bps now.
Supply chain linkages have been damaged since COVID-19 which were further impacted by war in Ukraine and now parts of the Middle East.
These tensions also impact inflation negatively primarily through commodity price spikes.
India’s CPI has moved largely in line or lower than the expectation while core CPI has been significantly lower than expectations.
Yet the rate cuts expectation in India has reduced as the MPC (Monetary Policy Committee) remained in pause mode reiterating that its policy would be guided by the target CPI of 4 per cent.
We also need to focus on the impact on the currency of lower rates on account of the differential in rates with the US.
The liquidity environment may improve in India as the government balance has reduced while a lower CAD (current account deficit) is positive for liquidity.
Also Read: Expert view: General Election 2024 a major trigger, upside looks limited, says Sunil Damania
What sectors could be the dark horse bets for the next one year?
BFSI as a sector provide valuation comfort as loan growth is in double digits, asset quality is robust, return profile is strong, and most banks are adequately capitalised.
I think the market is over-focussing on the short-term/quarterly volatility in NIMs (net interest margins).
I would prefer to focus on yearly ROE (return on equity) and ROA (return on assets) numbers, given valuations are cheap on non-earning measures such as P/BV (price-to-book-value).
Deposit growth acceleration is a key variable to drive performance in banks.
Also Read: Expert view: Worsening geopolitics biggest worry; bullish on banks and NBFCs, says Amar Ambani of YES Securities
Do you still see froth in mid and small-cap space? What should be the strategy for these segments?
The dichotomy in valuations is now stark with Nifty Midcap 150 and Nifty Smallcap 250 trading at a premium to the Nifty 50 index.
Pockets of mid and small-cap have seen elevated valuations on account of near-term earnings trajectory as well as sharp inflows in these segments.
However, even now we have pockets of value based on normalised earnings in select segments such as consumer durables.
Overall, we are much more comfortable with large caps as compared to small caps.
What are your views on the IT pack? Is it time to take fresh bets or we should wait for some time?
The IT sector has derated significantly over the last two years. However, if we change the reference years to a longer period, IT is trading at a premium to long-term averages.
However, the premium of the sector to Nifty has gone down sharply.
The sector has high free cash flows, shareholder-friendly capital allocation policy and best-in-class ROIC (return on invested capital).
None of these factors have changed. Near-term IT budgets in developed markets have seen pressure yet deal flows have been strong without a commensurate increase in revenues on account of leaking bucket and increase in tenure of deals.
I am broadly ‘neutral to positive’ as far as IT as a sector is concerned and believe value is emerging in large cap IT space.
What are your views on the cement sector? Do you expect a fresh bull phase?
Housing and infra are the largest contributors to cement demand and both sectors have witnessed cyclical uptick over the last two years.
Volume growth in the sector has surprised positively over the last two years while capacity expansion has surpassed volume growth, leading to stable capacity utilisation.
This has led to a lack of pricing power in the sector despite a robust demand environment.
The ROIC profile of a new cement plant is sub-optimal based on the current margin profile and capital costs.
Valuation of the sector is expensive based on earning-based measures while reasonable on asset-based measures.
We think the sector needs pricing power to generate ROIC higher than the cost of capital.
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Disclaimer: The views and recommendations above are those of the expert, not of Mint. We advise investors to check with certified experts before making any investment decisions.
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Published: 23 Apr 2024, 12:11 PM IST
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