The trajectory of US interest rates and pace of global economic recovery will be among the factors that will determine the direction of Indian equities in CY24, says Anand Shah, Head-PMS & AIF Investments, ICICI Prudential AMC. Shah tells businessline that the initiation of interest rate cuts by the Fed next year will drive FPI flows into emerging markets, including India. Edited excerpts:
What is your outlook for Indian equities for CY24?
The Indian equity market’s performance in CY24 appears contingent upon both domestic growth drivers and the influence of global economic dynamics, especially the trajectory of US interest rates and the pace of global economic recovery. Balancing these factors will be critical in navigating potential challenges and capitalising on the market’s strengths.
The Indian economic outlook remains positive, primarily due to the continued momentum in manufacturing and infrastructure spending by government. The anticipation of stable to lower US interest rates is expected to favour Indian equities. And despite the potential volatility due to the upcoming general elections, the sustained growth in earnings, particularly in B2B businesses within manufacturing and manufacturing allied industries, remains a strong positive.
Do large caps look more favourable than mid- and small-caps right now?
Large-caps appear to be better placed than mid and small-caps from a valuation perspective. We are bottom up in our approach, so to that extent market segmentation is immaterial. The interesting part here is that the earnings growth momentum is strong in manufacturing and allied business, and most of these businesses are housed within the mid- and small-cap segments. As domestic manufacturing gathers pace, these businesses will continue to see growth in the coming quarters as well.
What is the outlook for FPI flows going forward?
The primary catalyst for potential FPI inflows is the US interest rate trajectory. In our view, the US economy may undergo a slowdown due to higher borrowing costs. Our base case scenario anticipates the initiation of interest rate cuts by the Fed next year, spurred by this economic outlook and reduction in inflation. This is likely to drive FPI flows into emerging markets and India in particular.
What is your take on Q2 earnings growth and the outlook for the rest of FY24?
The consolidated earnings of the S&P BSE 500 index constituents were up by 25 per cent y-o-y in Q2FY24, led by margins tailwinds, while topline growth remained soft at 5 per cent y-o-y over the same period. A large part of earnings growth was driven by banks, autos, OMCs. Agri-input players witnessed sharp revenue de-growth due to pressure on volume and pricing given high channel inventory and increased imports from China. Going forward, we believe, margin tailwind could moderate due to the base effect and an increase in certain commodity prices.
Earnings of mid- and small-cap companies continue to be resilient, beating their large-cap peers. On a 1- and 2-year period, the earnings-per-share growth of mid-cap stocks has been robust. The EPS growth of small-caps for the last one year has been muted but on a 2-year basis, earnings have grown faster than price growth, leaving some valuation comfort.
Which sectors are you betting on?
We have been consistently overweight on manufacturing and the manufacturing allied sectors like auto ancillaries, metals, defense, textiles, capital goods, utilities, logistics and corporate banks as these pockets will benefit from the macro/micro tailwinds.
What about IT, pharma and banking?
We are cautious on IT due to the slowdown in the US and Europe, where most Indian IT customers are based. Though IT valuations have corrected, they are not yet attractive from an investment perspective. Our stance on pharma remains neutral, but we have some holdings basis our bottom-up approach. In terms of banking, our positive outlook persists, driven by robust growth potential from increased loan growth and declining credit costs. Over the past year, larger banks consolidated and have gained market share, fostering sustained earnings growth in the sector. We continue to prefer corporate banks over retail ones.