Sandeep Bagla, CEO of TRUST Mutual Fund says within mid-caps and small-caps, there are significant variations in valuations. He pointed out that the mid-cap and small-cap space will always be a stock pickers’ canvas. In an interview with Mint, Bagla talked about the current market structure and sectors he is positive about. Edited excerpts:
Can we expect a pre-election rally? How could the outcome of General Elections 2024 affect the domestic market?
In my opinion, the markets have already factored in stability and continuity to some extent.
In case the market senses a stable government, there is a good chance of a moderate pre-election rally as well. In general, markets do not like uncertainty of any kind.
If there is a hint of uncertainty, the market will try to adjust prices, considering how it might affect corporate earnings, P/E multiples, and so on.
I am not an expert in politics; hence I won’t be able to predict what will unfold. However, markets favour stability and the elimination of uncertainty.
How should one invest in the current market? Should we focus more on defensives? How should we trade in the mid and small-cap segments now?
In the current market, it would be prudent to stick to one’s asset allocation and increase exposure accordingly.
While considering defensives for stability, one should not exclusively concentrate on them; diversification across sectors remains crucial.
Some defensive sectors like utilities or healthcare could offer stability, while growth opportunities could come from sectors like IT and consumer durables.
Some mid and small-cap stocks may have run a bit too far, but that need not mean that the whole segment is expensive.
Within mid-caps and small-caps, there are significant variations in valuations.
Mid-cap and small-cap space will always be a stock pickers’ canvas and there are a couple of reasons for this.
One is the sheer number of companies and sub-sectors to choose from –there are over 3,000 listed companies out of which large-caps are only 100 i.e., 3 per cent in terms of numbers.
So, the universe of mid, small and micro-caps is very large. Second is the fact that most of the new, upcoming and exciting sectors where we expect high growth are represented only in the mid and small-cap space.
Sectors and sub-sectors like capital goods, defence, railways capex, electronics and durable manufacturing, construction, renewable power, power transmission and distribution, China-plus-one theme plays, beneficiaries of the production-linked schemes, chemical and pharma companies, etc., are mostly represented only in the mid and small-cap space.
Also Read: InCred sees Nifty FY24 target at 21,103; suggests booking profits in infra stocks
Should one buy into the IT sector at this time or wait for the next two to three quarters?
The Indian IT sector, predominantly dependent on overseas earnings, has struggled with extensive challenges due to macro-level concerns in the recent past.
Factors such as heightened furloughs in developed nations and reduced spending in technology, telecom, and related fields impacted IT stocks more than initially projected, leading to subdued market performance.
Additionally, the banking turmoil in the US and Europe had a detrimental effect on India’s IT business process management industry, which derives a significant 41 per cent of its revenue from the BFSI sector.
With the second quarter earnings in this space not very encouraging, it will be good to remain cautious and watch the developments in this sector.
Also Read: Nifty 50 at record high; time to increase exposure to equities or turn cautious?
Is there more steam left in the defence and power sectors?
Defence manufacturing is one space which could be interesting in the time to come.
We are bullish on the power sector overall.
Renewables are the high-growth space but there is going to be demand for conventional energy too if the GDP continues to grow at a healthy pace.
Moreover, with increasing supply from renewable sources, the transmission and distribution systems would also go through a major overhaul.
The smart meter is one theme one can look out for.
Also Read: India Q2 GDP: Indian economy poised for strong growth in FY24? Here’s what top economists say
Which sectors are you positive about for the next two to three years?
I expect the Indian economy to do better than the rest of the world. So, the preferred sectors are domestic-focused.
Fundamentally, I believe that we are on the cusp of an investments-led growth phase in manufacturing, infrastructure creation and real estate.
So capital goods, construction, real estate, defence manufacturing, railway investments, etc., are the sub-sectors which should see significant momentum in the next few years.
Apart from these physical-asset-creating sectors, financials look good.
Banking and financials are the largest sectors, and these are expected to drive earnings growth as they are in a sweet spot – credit growth is picking up while banks/NBFCs have cleaned up their balance sheets and shored up capital.
The recent RBI directive to increase the risk weights on unsecured loans, however, can be a short-term dampener.
The hope is that now corporate sector demand for loans will pick up as the bulk of the increase in loans has been in retail (secured as well as unsecured) lending.
Consumption, especially in the lower end has not picked up satisfactorily yet and stocks have underperformed due to this.
If this picks up then there could be interesting plays in FMCG, auto (two-wheelers), etc.
Has interest rates peaked in the US? Do you think the US Fed can go for one more rate hike?
The CPI readings are going to be above the Fed’s target rate of 2 per cent for a long time to come.
The Federal Reserve’s stance on rate hikes hinges on ongoing economic indicators, especially inflation and employment data.
While there is speculation about a potential peak, the Fed’s decisions remain contingent upon evolving economic conditions.
While the momentum of inflation could be coming down, it is quite likely that we are not likely to have any more interest rate hikes in the US.
In fact, market participants are now talking about rate cuts. I think all the central bankers have been saying that we need to have higher rates for longer.
US Fed’s approach is likely to remain cautious and data-dependent, aiming to strike a balance between economic growth and inflation control.
Do you see the possibility of the US tripping into a recession in the US? How could it impact the Indian stock market?
Interest rates in the US and the developed world are likely to remain higher for longer as inflation and growth are both higher than expected, especially growth.
The bond markets are reflecting this view and hence the 10 and 30-year bond yields are moving higher.
Now around 4.50 per cent which is a level not seen or sustained for 15-20 years. While overall consumption is still robust, investments and real estate are slowing down.
There is a high probability that we will see a sharp slowdown or even a recession in the US if these conditions of high inflation and elevated interest rates continue.
In contrast with the global situation, growth expectations for India remain stable, and we are likely to be the fastest-growing large economy in the world in 2024.
This year has seen excellent growth in corporate earnings and the market expects another good year in FY25, with earnings growth of 15 per cent for Nifty 50 companies.
Downward-trending global interest rates, moderating global growth and stable domestic growth are a good Goldilocks situation for India.
Overall, the India story is intact, and we approach 2024 with continued optimism and excitement.
Consumption, while still K-shaped, is holding up and investments are likely to pick up as the private sector reaches high capacity utilisation.
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Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.
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