Expert view: Dhaval Gada, Fund Manager at DSP Mutual Fund, believes BFSI, power, technology, oil and gas, and the consumer sector have some pockets of opportunity. In an interview with Mint, Gada says investors should have moderate return expectations as valuation is high. Nifty trades one standard deviation of the historical long-term average on price-to-earnings (PE) and price-to-book (PB) basis.
Nifty 50 trades above one standard deviation of the historical long-term average on price-to-earnings (PE) and price-to-book (PB) basis.
Hence, ideally, on a headline basis, investors should have moderate return expectations.
However, some sectoral/thematic opportunities remain attractive even at current levels, especially from a risk-reward perspective.
On aggregate, during the quarter, we have seen a flat to marginal decline in Nifty 50 EPS expectations for FY25.
Some companies have called out the harsh summer and general election as impacting earnings outcomes.
In addition, we have seen some positive commentary on the earnings outlook for the IT sector, an uptick in rural demand, and power sector capex.
Year-to-date returns have been quite healthy despite growth and monetary policy uncertainty globally.
Part of the reason is that we have seen some upgrades in GDP growth and Nifty 50 EPS expectations for FY25 compared to the start of the year.
In addition, domestic liquidity flows into capital markets have been quite buoyant.
Sustaining this level of multiples would be contingent on how the earnings growth outlook moves beyond FY25 and FY26.
In markets, it’s always difficult to call for peaks or troughs; hence, staying invested long-term and focusing on asset allocation to meet financial goals and navigate market cycles is crucial.
We have seen solid market returns in the last few years, which are better than the long-term average; hence, below-average returns are always possible in the near term.
Our approach has been to remain invested, focus on the potential risk-reward of the existing investments compared to new investment ideas, and rotate capital accordingly, thereby improving the quality of the portfolio.
BFSI, power, technology, oil and gas, and the consumer sectors have some pockets of opportunity.
However, valuation should not be judged in isolation and should be contextualised along with business cycles.
For instance, today's business cycle is extremely strong in real estate or the power sector compared to the last 5-10 years.
Similarly, within BFSI, banking as a subsector is in the top quartile from a business cycle perspective, while valuations are around long-term average levels.
The framework focuses on bottom-up investment opportunities based on potential risk rewards.
For instance, some optically very expensive stocks deliver better-than-market returns driven by earnings upgrades.
Hence, it is crucial to focus on the investment thesis, catalyst, ownership structure, risk-reward, and industry business cycle, among other parameters.
Yes, it is an important change in monetary policy stance from a global standpoint.
As the market starts pricing in this change, we could see rotation into some sub-segments of BFSI, technology and commodities.
The general expectation is a shallow policy rate cycle in India following the Fed rate cut.
Apart from rate cuts, observing how liquidity is managed would be crucial in the Indian context as it can impact credit flow into the economy.
Inflation has been trending lower towards RBI’s target zone, which should significantly affect a cohort of lower savings households and, thereby, consumption demand in those baskets.
Geopolitical risks are always one of the key risk factors for the Indian market from a short-term perspective.
From a medium—to long-term perspective, corrections due to some of these events have generally turned out to be good investment entry points, such as the Ukraine conflict in 2022.
Major conflicts impact supply chains and global macro, resulting in price volatility in the short term.
The high beta sector, like financials, is generally more affected due to its high linkages with the economy.
In the lending business, credit and deposit growth in FY24 was at multi-year highs; asset quality parameters were at multi-year lows, resulting in top quartile return on equity.
We see healthy growth momentum for the next several years with a reasonable return on equity.
Key risks to our thesis are (a) an uptick in loan losses from the retail and SME segment, (b) materially adverse regulatory changes, (c) moderation in economic growth and (d) higher than expected reduction in policy and market rates.
Hence, preference is for businesses that are expected to have a neutral to positive impact on these factors. In non-lending businesses, we have seen strong price appreciation in capital market-linked businesses, which has led to material re-rating in this sub-sector; buoyant equity markets are crucial to sustain these multiples.
In the insurance sector, regulatory changes can have short—to medium-term impacts on profitability.
However, valuations remain reasonable, and the longer-term growth outlook remains healthy.
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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.
