How to make money in this falling market? Here’s what Anirudh Garg of Invasset PMS has to say

Benchmark equity indices BSE Sensex and NSE Nifty cracked more than 10% from their respective all-time high levels, scaled in September 2024. Factors such as heavy selling by foreign institutional investors (FII), falling rupee and the ongoing geopolitical tensions dampened market sentiment. So, where are the Indian equity markets headed from here onwards? How an investor can make money in this market? In an interaction with Business Today, Anirudh Garg, Partner and Fund Manager, Invasset PMS shared his insights. Edited excerpts:
 
What’s your 12-month outlook for domestic equity markets? Should investors currently prioritise large-caps over mid- and small-caps?

Over the next 12 months, the Indian equity markets are expected to experience moderate growth. While the NSE Nifty 50 and BSE Sensex have shown resilience compared to midcaps and small caps, recent corporate earnings have been underwhelming, raising concerns about an economic slowdown. Under these conditions, large-cap stocks may offer more stability due to their established market positions and diversified operations. Mid and small-cap stocks, though potentially offering higher returns, could face greater volatility. A cautious approach favouring large caps might be prudent in the current market scenario.

Suggest a few sectors that may deliver decent returns to investors from here on.

Sectors like Pharma, FMCG, and defensives are likely to deliver stable returns from here onwards, given the current economic landscape. The pharma sector benefits from increased health awareness and government incentives promoting local production. These factors, combined with the global trend towards enhanced healthcare spending, make pharma a resilient choice.

Meanwhile, FMCG companies continue to enjoy steady demand, as they provide essential goods that remain in demand regardless of economic cycles. This consistency in cash flow and relative insulation from market volatility makes FMCG an attractive sector.

Additionally, defensives, encompassing utilities and essential services, offer reliability as they are less sensitive to economic fluctuations. Their steady revenue generation and lower correlation with broader market movements help in capital preservation. Together, these sectors provide a blend of stability and resilience, making them a “safe bet” for investors seeking returns with reduced risk.

What should be the optimal strategy to make money in this market?

In the current market environment, the focus should shift from aggressive returns to capital preservation. With high valuations and rising market volatility, a prudent approach would involve cautious allocation and a selective choice of sectors. Instead of chasing high-growth stocks, investors should lean toward quality companies with strong balance sheets and stable cash flows. Defensive sectors like FMCG, pharma, and utilities offer relative safety and act as buffers against market downturns. Diversifying across asset classes, including fixed income, can further balance risk and maintain liquidity.

Additionally, holding a portion of investments in cash can provide flexibility to seize opportunities as valuations become more attractive. By prioritising preservation, investors can navigate the current market uncertainty with less risk, waiting patiently for more favourable conditions to emerge for growth-focused strategies. This conservative stance protects existing capital and positions investors to capitalise when market conditions stabilise.

What are your key takeaways from Q2 earnings? How do you see the Q3 result season?

Q2 earnings showcased a mixed bag for Indian corporates. Elevated input costs weighed on profit margins, especially in industries reliant on raw materials impacted by global volatility. 

Additionally, the persistent inflationary pressures have led to cautious spending in urban areas, affecting sales growth for consumer-oriented businesses. Foreign investor outflows added another challenge, contributing to stock market fluctuations that indirectly impacted corporate valuations and sentiment.

As we move into Q3, the festive season may lift consumer demand, especially for retail and FMCG sectors. However, inflationary trends and global uncertainties could continue to exert pressure on margins, particularly if energy and input costs remain elevated. While cautious optimism is warranted, investors should be mindful of the headwinds that could shape Q3 results in key sectors.

What does Donald Trump's victory mean for Indian investors?

Donald Trump’s recent election victory introduces a complex landscape for Indian investors. His “America First” policies may lead to stricter immigration rules, potentially affecting the H-1B visa program and, consequently, India’s IT sector, which relies heavily on US markets.

Additionally, Trump’s protectionist trade stance could result in higher tariffs on Indian exports. However, his firm position against China might strengthen US-India strategic ties, benefitting potential collaborations. Investors should monitor these developments closely, as they present both challenges and opportunities in the evolving economic relationship between the two nations.

How do you see the Indian IT and pharma sectors from here onwards?

The Indian IT and pharmaceutical sectors are poised for significant developments shortly. India's IT industry is expected to experience robust growth, with spending projected to reach $138.9 billion in 2024, marking a 13.2% increase from the previous year. This expansion is driven by increased investments in emerging technologies such as artificial intelligence (AI), cloud computing, and data analytics. Companies are focusing on digital transformation initiatives to enhance operational efficiency and customer engagement. However, the sector faces challenges, including the need to upskill the workforce to keep pace with rapid technological advancements and address concerns related to data security and privacy.
 
On the other hand, India’s pharmaceutical industry continues to be a global leader in generic drug production and is increasingly focusing on innovation and research. A significant area of growth is the Contract Development and Manufacturing Organization (CDMO) segment. The Indian CDMO market is projected to grow at a Compound Annual Growth Rate (CAGR) of 14.67%, reaching $44.63 billion by 2029. This growth is fueled by factors such as the increasing demand for generic drugs, cost advantages, and a skilled workforce.

Additionally, global pharmaceutical companies are outsourcing more of their manufacturing and development processes to Indian CDMOs to optimise costs and focus on core competencies.

FIIs have sold shares worth more than Rs 1 lakh crore since October. When do you think they will return?

The return of Foreign Institutional Investors (FIIs) to Indian markets largely depends on the global economic environment and India's relative appeal as an investment destination. Presently, FIIs are cautious, given the stronger dollar, interest rate uncertainties and geopolitical tensions, which have made developed markets more attractive for safer returns.

However, as inflation stabilises globally and central banks signal a pause in rate hikes, risk appetite may increase, prompting FIIs to look back at emerging markets like India. India’s strong economic fundamentals, growth prospects, and recent regulatory reforms provide a solid long-term investment case. Sectors like green energy, financial technology, and infrastructure development align well with global investment themes, potentially drawing FIIs back as the economic outlook stabilises. 

If macroeconomic indicators remain favourable, we could see FIIs returning gradually within 6-12 months, particularly as they seek to capitalise on India’s growth story amidst other maturing markets.

What are the major challenges that could potentially weigh on market sentiment going ahead?

Several factors could weigh on market sentiment in the Indian equity market in the near term. Persistent inflation, especially in food and energy prices, may prompt the Reserve Bank of India to either maintain or raise interest rates. This would increase borrowing costs for businesses and consumers, potentially slowing economic growth — particularly in sectors dependent on consumer spending and capital investment.

Global uncertainties, including geopolitical tensions and commodity price fluctuations, also present risks. For instance, escalating conflicts could disrupt supply chains or drive up import costs, squeezing margins for industries dependent on raw materials and energy.

Additionally, foreign investors might remain wary if the US dollar strengthens or if more attractive yields emerge in other markets, potentially leading to a reduction in Foreign Institutional Investor (FII) inflows. A slowdown in corporate earnings growth or increased regulatory uncertainty could further dampen investor sentiment, highlighting the need for caution in the current market environment.