‘Mid, smallcaps attractive from 5-yr horizon’

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Indian equities have experienced a consolidation phase over the past 18 months, leading to more reasonable valuations, says Vinit Sambre, head of equities, DSP Investment Managers. In an interview with Ashley Coutinho, Sambre says corporate India’s performance in terms of earnings growth will serve as the most crucial catalyst for the equity markets going ahead. Excerpts:  

What are the key triggers to watch out for Indian equities in the year ahead?

We find ourselves in an intriguing phase of the macroeconomic cycle, where global concerns about a recession are prevalent. However, the Indian economy stands out with its superior growth, largely thanks to the government’s well-executed policy measures. Additionally, Indian equities have experienced a consolidation phase over the past 18 months, leading to more reasonable market valuations. The corporate sector’s performance in terms of earnings growth will serve as the most crucial catalyst for the Indian equity market. In the recently concluded quarter, Nifty50 companies reported a 15% increase in earnings, a trend we expect to continue. Although slowing demand may have some adverse effects, these might be offset by improved margins resulting from deflation in input costs, thereby sustaining the momentum of earnings. Nevertheless, we must remain vigilant concerning global factors such as recession, inflation and interest rates, as they have the potential to create market volatility.

Do you expect a Fed and RBI pivot soon?

We expect a long pause hereon for both and then a move towards the cut. The threshold to raise rates is now too high for either of them. It is unlikely that inflation data can make them hawkish from here. However, a cut will be dependent on growth slowdown, which can be measured by job market dynamics and core inflation. For now, we think it will be a pause for a few quarters until the data start to turn towards very low inflation or a growth slowdown.

What is your take on valuations?

The overall market valuations appear reasonable. Pockets of value can be found in pharmaceuticals, banking, insurance and agri-based sectors. These sectors show potential for investment opportunities, given their current valuation levels. Large-, mid-, and smallcap indices have exhibited almost similar compound annual growth rates over the past five years. This indicates that the small and midcap segments are now attractive from a long-term perspective.

Could you elaborate on the opportunities in the mid and small-cap space?

Mid and smallcap stocks present an intriguing opportunity in the next five years. The growth of the economy is expected to have a positive impact on these companies, as they stand to benefit from the upward trajectory. Additionally, the shift in preferences towards organised sector players further contribute to the growth potential of mid and small-cap companies. In terms of valuations, smallcap stocks are currently trading at a discount compared to their 10-year averages, while midcap stocks are in close proximity to their 10-year averages. This suggests that investments made with a long-term horizon could be considered at this point.

What is the outlook for FPI flows going forward?

The India outlook appears compelling given the macroeconomic context, particularly when compared to other major economies like China, which are facing their own distinct challenges within the emerging markets. Therefore, if interest rates come off and risk appetite grows among foreign investors, they would likely consider exploring Indian equities. Our interactions with a few FPIs indicate that while they have some concerns on market valuations, they are not particularly worried about the fundamentals of the Indian economy. Consequently, any weakness observed in the Indian markets would attract these investors, prompting them to allocate additional funds to India. Overall, the combination of a favourable macroeconomic backdrop and relative stability in the Indian economy makes it an appealing destination for foreign investors.

What measures have you taken to immunise your portfolio from any slowdown or recession-like situation?

Our approach focus is on devoting more time to bottom-up research for each individual company while having some consideration to macro-economic factors. Our primary objective is to assess whether a company has the potential to generate long-term wealth. Given our long-term time horizons, macro factors play a less significant role and may only create short-term volatility. Relying solely on macro factors to build portfolios has proven to be less effective due to potential timing mismatches between our expectations of when certain events will occur and the actual impact or degree of impact they have. However, by taking into account both the current macro and micro factors, we have allocated investments to the banking, pharmaceuticals, automotive, and agro-based sectors. We believe these sectors are well-positioned to navigate the current environment successfully.

Could you tell us more about your views on the banking and IT sectors?

We find the banking sector to be an attractive investment opportunity based on its improving performance indicators. These include higher credit growth, stable net interest margins, low credit costs, and improved return on assets. In our current portfolio allocations, we have a greater preference for private sector banks, as they have demonstrated a more consistent track record of wealth creation compared to public sector banks, which have faced challenges in the past. We maintain a cautious stance on the growth prospects of the IT sector in the near term considering the potential recessionary impact. However, we remain open to exploring investment opportunities within the sector if more reasonable valuations emerge.


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