Flows may gravitate to large caps this year, says Ashish Gupta of Axis Mutual Fund

The mood in the first half may be driven by the Lok Sabha elections as well as the interim Union Budget to an extent. Globally, too, many of the large countries will be going through elections.

India’s growth trajectory is expected to remain on a firm footing, supported by a recovery in capex and industrial activity. India continues to be one of the few geographies globally that continues to record strong GDP growth with multiple positive drivers in place to sustain it. Overall, stronger economic growth prospects and improving earnings outlook are expected to augur well for equities.

Mid- and small-cap stocks are trading at two standard deviations above their historic premium to large cap indices. The Nifty, bolstered by a solid earnings trajectory, is currently trading at about 20x on a one-year forward basis. Assuming there are no significant external disruptions, the existing market multiples are likely to be maintained, supported by strong domestic investment flows.

Despite significant inflows last year, FPI holdings in the BSE 500 universe remain near their all-time lows. FPI flows could likely continue and their holdings would increase hereon fuelled by strong domestic economic growth, expectations of political continuity at the Centre, controlled inflation and robust corporate earnings.

The median projection among Fed members on interest rates at the end of 2024 fell to 4.6 per cent in the December policy from 5.1 per cent earlier. This means the Fed may cut interest rates by 25 basis points at least three times this year, unless there are unknown shocks that translate into higher inflation. The RBI, on the other hand, has not indicated any intent to ease policy rates till it achieves a 4 per cent headline inflation. If inflation eases to 4 per cent by September this year as forecast, we could see market expectations around lower interest rates build up in that timeframe.

Domestic investors have emerged as a big support for equity markets. This can be seen in the mutual funds’ share in BSE 500 universe, which is at an all-time high. This trend also highlights the reducing reliance on foreign flows for domestic capital formation. The mid- to single-digit household assets in equities and the move towards reducing minimum SIP ticket size can further stimulate this trend.

Mid- and small-cap funds saw inflows of about ₹59,000 crore till November last year versus outflows seen in large cap funds. One can expect the flows to reverse and move to large caps this year. It’s best that investors have a diversified approach to investing rather than get caught up in the large cap versus mid- and small-cap debate.

The September quarter saw better than expected earnings, resulting in earnings upgrades. The key theme was continuation of lower input costs, which helped companies improve their profitability in spite of muted y-o-y revenue growth. Mid-cap and small-cap companies in the BSE-500 Index witnessed 55 per cent y-o-y growth in PAT in Q2FY24, slightly ahead of large-cap companies. We expect strong performance of domestic cyclicals to continue for the remainder of FY24, driven by better-than-expected margin improvement in automobiles and stable NIMs for banks. Consumption-based sectors may remain under pressure given lacklustre rural recovery.

The private capex cycle, which is seeing initial signs of recovery, may benefit from infra, manufacturing, commodities and utilities stocks. Banks are expected to benefit from the corporate re-leveraging cycle. As companies seek financing for expansion and new projects, banks will likely see an increase in credit demand, which should bolster their performance. Effects of El Nino may continue, weighing down rural and agri sector and impacting broad-based consumption.

The data suggest muted demand outlook for the sector in the near to medium term. Major verticals such as BFSI, retail and manufacturing remain in a slump. Communications continues to take a hit. We expect a turnaround in the hi-tech space, driven by AI demand. GenAI-led demand is creating a cushion for enterprise cost optimisation. Green shoots have already started to emerge in the vertical. Healthcare and travel continue to see positive demand, but we expect the healthcare vertical of India’s IT services firms to moderate given the moderation on the client side.