What is your outlook for Indian equities?

Despite a 12 per cent correction from the peak, Nifty is still trading at 22 times price-to-earnings multiples and MSCI India is trading at 24.8 times compared to 13.5 times for MSCI Emerging Market. With expected earnings growth of 6-7 per cent for the current financial year, the growth premium for Indian markets is not justified. We see macro-economic growth bottoming out from the current quarter, but this may not immediately translate to earnings growth. Strong USD, rising crude prices and increasing US yields are the headwinds for Indian equities. FPIs may continue to reallocate capital away from India.

What is your take on valuations?

Large-cap stocks are trading at more reasonable valuations than mid-caps. A slow growth environment is generally challenging for mid and small-cap stocks. The only comfort is that FPIs do not have large exposure to such stocks and so the selling intensity has been lower.

How will the Trump trade policies play out?

The US is the largest economy in the world and accounts for large global allocation of risk capital across the world, including emerging markets. The Trump administration is talking about US First Policies, improving efficiencies in government and cutting down income taxes, which would be positive. However, imposition of import tariffs would be inflationary. Similarly, immigration policies may have an impact on the availability of labour force, leading to a rise in wages. We expect FPI outflows to continue till we achieve clarity on US policies.

Domestic flows have remained resilient. What is your take on it?

A large part of domestic flows in equity markets are routed by individuals through mutual funds. At the same time provident funds are also reallocating capital towards equity markets. The mutual fund, PF and insurance money cannot be invested abroad and, hence, this money is chasing stocks at unreasonable valuations in Indian markets.

How far are we from a rate cut by the RBI?

India’s GDP growth may pick up marginally from the current levels. Global tariffs are keeping the US dollar strong and this would lead to a shallow policy rate cut by the RBI in the next six months. However, if the US fiscal deficit remains high under the new administration, we may see a hardening of US yields and this would make it difficult for RBI to reduce rates.

What are your expectations from the Budget?

We expect that India would continue on the path of fiscal consolidation and avoid inflationary pressures or sharp currency depreciation. There may be some relief given to senior citizens on taxation.

Which sectors do you find favourable right now?

Asset allocation is a bigger decision at this stage. Building aggressive positions in equity may lead to sub-optimal returns in the portfolio. We may see some more pressure in the banking sector and sharp corrections in this sector would be a good opportunity to buy frontline banks. FMCG is well placed post the recent correction. We would like to wait for a correction in IT stocks before buying.

Published on January 22, 2025