Indian equity markets have witnessed a correction in the past two months with the Nifty50, Nifty Midcap 100, and Nifty Smallcap 100 falling around 8-9% till November 22. A few factors, such as moderate corporate earnings, relentless selling by foreign institutional investors (FIIs), geopolitical tensions and strengthening of the dollar index after the victory of Donald Trump weighed on market sentiments. The anxiety around Maharashtra elections had further kept the market volatile in the recent past. So, can investors create a portfolio in this market? In an interaction with Business Today, Feroze Azeez, Deputy CEO, Anand Rathi Wealth shared his insights. Edited excerpts:
Q. How do you see the domestic equity markets for the next 12 months?
Azeez: India’s September 2024 quarter earnings season largely met market expectations, especially for the Nifty 50, with aggregate sales growth at 4.3% year-on-year and profit after tax rising by 3.5%, in line with the consensus. The EPS growth of 9.4% for Nifty 50 and 7.8% for Nifty 100 contrasted with subdued performances in the midcap and small-cap segments, reflecting flat growth there. At present, valuations appear reasonable with no major froth. Our estimates show that the Nifty50 fair value is at 24,782, Nifty Midcap 150 at 20,069 and Nifty Smallcap 250 at 17,257.
Q. Which sectors may deliver decent return to investors from here onwards? Why?
Azeez: We are positive on consumer durables and FMEG as demand remains strong for high-value products with minimal inventory levels, supporting continued growth through H2FY25. We are also bullish on the banking sector. Strong domestic fund inflows and a steady credit expansion cycle drive the sector’s consistent growth. Treasury gains are expected to remain moderate, influenced by stable government security rates, enhancing overall profitability. Stable asset quality continues to support robust loan growth and healthy margins, positioning the banking sector as a dependable growth area amid global volatility. Investors can also consider the auto sector. Growth in two-wheelers is a major driver, supported by expanding rural markets, while premiumisation in passenger vehicles boosts revenue. Enhanced product mix, price hikes, and demand for high-value models support long-term sectoral growth for the automobile sector.
Q. What should be the right strategy to make money post Maharashtra election outcome?
Azeez: From a medium-to-long-term perspective, the average annual return on Indian equities is expected to be 11-13%. Investors should focus on building an asset allocation strategy, with an 80:20 mix of equity and debt to help ride volatility in the long term, as these asset classes have a low correlation. Equity mutual funds, on average, deliver an additional 2-3% over the Nifty 50, resulting in a 13-15% return. We expect 11-12% growth in large caps and around 20% growth in the mid- and small-cap segments. A balanced approach with 55% in large caps and the remainder in mid and small caps can help in portfolio diversification.
In the case of debt products, arbitrage funds can offer equity-like taxation and debt-like returns. Reviewing and rebalancing the portfolio’s asset allocation strategy is essential if required.
Q. What does Donald Trump's victory in the US presidential elections mean for Indian investors?
Azeez: The US elections are over and Donald Trump has returned as US President, this could give the American economy a big push. Trump’s approach to boosting GDP growth is usually around bold trade deals and the use of tariffs as leverage to get the best terms for American industries. On the fiscal side, Trump might cut back on international spending and welfare programs, channeling those resources into US infrastructure—this move can create jobs and develop the economy. Reducing government spending could also shrink the fiscal deficit, helping to keep inflation in check unlike market expectations, and setting the stage for potentially lower interest rates further.
With stricter immigration policies and lower taxes, it might also mean more job openings and higher wages for American workers, giving a lift to consumer spending. Altogether, these policies could support strong corporate profits, boosting shareholder value and investments.
For strategic partners like India, this could mean more stable trade relations, new growth opportunities, and greater collaboration in areas like tech and manufacturing.
Q. How can a falling rupee further impact market sentiment?
Azeez: A weaker rupee makes imports more expensive, increasing input costs for companies in sectors such as oil and gas, chemicals, pharmaceuticals, electronics etc. This, in turn, impacts corporate profit margins to a certain extent. Costlier imports may impact domestic inflation partially. FIIs might also pull out further in fear of currency loss which can partially affect the market. On the other hand, exports become more attractive and can benefit from this scenario.
Q. What is your take on FMCG sector?
Azeez: In Q2 FY25, demand saw a sequential uptick, but heavy rains and floods dampened out-of-home consumption, particularly in the beverage segment. Rising raw material costs are expected to lead to further price hikes in H2 FY25. Many urban distributors (general trade) saw growing inventories and extended trade credit as competition from local players intensified. While alternative channels reported double-digit growth, traditional ones are performing moderately.
Inflationary cost trends were seen for a few commodities such as vegetable oil, coffee, palm oil, copra, etc. This could lead to gross margin pressure for certain companies while remaining benign for others. EBITDA margins should expand at a slower pace year-on-year as companies focus on brand investments to drive volumes. Despite these challenges, we remain optimistic about rural recovery, aided by good rainfall, festival demand and government initiatives.
Q. By when do you think FIIs will return?
Azeez: Both the stimulus policy and the elections partially affected the Indian markets, however, India stands resilient even as FII flows continue shifting towards China with DII inflows being at a peak in the last one month at Rs 1,07,255 crore against last 6-month DII inflows. Despite recent flows into China's market, FIIs are believed to be in the final stages of their sell-off in Indian markets, and we expect the outflow pressure to ease soon.
Q. Which factors will drive Indian equity market from here onwards?
Azeez: India’s equity markets are gearing up for steady growth, backed by strong economic fundamentals. With real GDP expected to grow at 6-8% over the next five years, India is set to remain the fastest-growing major economy. Inflation looks well under control within the RBI’s target range, creating room for potential rate cuts soon. On the fiscal side, tax collections have been strong, the deficit is in check, and spending growth is disciplined – all pointing to a solid foundation for market confidence.
On top of that, falling bond yields (likely to drop below 7% as inflation cools) could give equity valuations a nice boost. Historically, lower yields mean higher equity multiples, and that trend looks set to continue. Valuations right now are reasonable, with both large-cap and small-cap stocks offering attractive opportunities. Earnings growth for Nifty 50, midcaps, and small caps is expected to be in the 11-22% range over FY25-26, which means there’s a lot to look forward to in the market over the coming years.
Q. What are the key challenges which may further dampen market sentiments?
Azeez: Continued higher inflation above the RBI target level can keep interest rates higher. The rupee weakening in the near term may impact the returns and thus make FII investors unattractive. A slowdown in global trade may impact India’s exports and external balances and current account deficit.