‘Political stability, GDP forecast key positives but high valuation a key risk’

Edited excerpts:

What is your outlook for the market in the short term? Is the Indian stock market at a fair valuation?

Markets recovered the losses of June 4th, with the Nifty 50 index closing above 23,300 on June 12. 

It remained volatile due to the election results. Eventually, the uncertainty around the election results died down, and the market and investors well-received the fact that the existing government would continue for the third term. 

Based on the RBI Monetary Policy announcement on June 7th, the projected GDP growth rate of 7.5 per cent for FY25 further led to a market rally by the end of Friday. 

With India’s biggest democratic festival (Lok Sabha elections) out of the way, the next few months will be focused on the new government delivering on their 100-day agenda that was prepared ahead of elections with changes being made keeping in mind the new coalition government. 

Concerning valuation, Nifty 50 is currently at a P/E (price-to-earnings) ratio of 22.1 against the historical average of 20.33. This should caution against any expectation of high returns.

Foreign investors have significantly sold off this year despite India’s solid macro outlook. What is driving FIIs (foreign institutional investors) away from the Indian market?

FIIs sold a record $1.5 billion worth of Indian shares in election results week, surpassing the previous high of $1.05 billion of outflows in January 2024. 

This was due to concerns about the continuity of the existing government’s policies, given the narrow majority in recent election results. 

Foreign investors’ cautious behaviour regarding investments in India this year has been due to volatility caused by the Lok Sabha elections and uncertainty surrounding the outcome of the Indian general elections until the end of May. 

Other factors leading to the outflow of foreign funds from Indian markets have been the rise in US bond yields due to no rate cuts in the US market, the outperformance of Chinese stocks (the Hang Seng index rose by 8 per cent in May), and, in general, the valuations of Indian markets have been high despite lacklustre financial and IT sector corporate earnings performance, which is driving investments in countries other than India.

Is it the right time to increase exposure to equities? How can one protect wealth in a volatile market?

The overall outlook for the Indian equity market for the year 2024 is optimistic yet cautious. 

India is amongst the fastest-growing economies globally. However, equity markets can be volatile. 

So it is essential to abide by your asset allocation strategy, risk tolerance and investment horizon. 

Stick to your investment basics, stay diversified, monitor your investments regularly, rebalance periodically, and stay in line with your strategic plan. 

India’s manufacturing and infrastructure sectors remain on a strong medium-term growth trajectory as underlying drivers continue to strengthen. 

With the continuation of the existing government, we expect the infrastructure thrust to continue. 

Rising power demand and the need to reduce carbon footprint will continue to drive investments in renewable energy and other new technology areas. 

The banking system is well-supporting credit growth with desired asset quality and should continue to improve. 

Real incomes would positively impact consumption and start growing again. India is also expecting above-average monsoon this year based on IMD’s projection. 

Hence, it should boost both the FMCG and automobile sectors as well as the demand from rural India.

With the monsoon expected to remain above normal, how will it impact the FMCG and automobile sectors? Which one are you positive about?

The Indian Meteorological Department (IMD) has positively predicted above-average rainfall in 2024. 

This should boost the FMCG and automobile sectors. With the supply of food products expected to remain normal, it will satisfy consumer demand and keep inflation in check. 

Good rainfall should also enhance rural demand and aid in FMCG sales accordingly. 

Normal monsoons tend to increase tractor manufacturing and sales, benefiting automobile companies. 

Overall, good monsoons increase rural demand and boost the agriculture sector and rural income. 

So, it is likely to benefit both sectors (i.e. FMCG and automobiles).

When can we expect recovery in the IT space? Should one avoid the sector or take some contra bets?

Indian IT sector’s spending is forecasted to hit $138.9 billion in 2024, up by 13.2 per cent from $122.6 billion the previous year. 

This growth is expected across software, devices, IT services, and data centre systems. 

Software spending may witness the most significant growth rate of 18.6 per cent. Generative artificial intelligence (GenAI) spending may remain minimal as companies are mostly in the planning or evaluation stages. 

Globally, the IT sector spending is expected to reach $5.06 trillion this year. 

Apart from the above, the government’s thrust on digital infrastructure initiatives, increased foreign investments, a thriving startup ecosystem, and a forever-growing talent pool in the technology sector keep the overall Indian IT sector on an upward trajectory. 

The Indian IT industry employs 5.4 million people, accounting for approximately 7.5 per cent of India’s GDP. 

Revenue (including hardware) is estimated to reach $254 billion in FY2024, a 3.8 per cent year-on-year (YoY) growth. 

However, challenges remain in achieving the ambitious $350 billion target by 2026.

What are your expectations from the Budget 2024? With a coalition government at the Centre, do you expect the Budget to be populist?

The government should continue to support capex-led projects, infrastructure improvements, and targeted welfare measures. Given the global slowdown and geopolitical risks, private consumption growth may not significantly improve. 

Lower oil prices may benefit, leading to benign inflation and less strain on disposable household incomes. Divestment targets may continue, albeit at modest levels. 

The government may keep fiscal deficit targets under check, and populist measures may remain subdued in the new government’s first year.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.

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Published: 12 Jun 2024, 05:25 PM IST

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