Expert view: India relatively better placed, but valuation remains a concern, says PGIM India’s Portfolio Manager

Expert view: India is relatively better placed, but valuation is a concern, says Surjitt Singh Arora, Portfolio Manager, Portfolio Management Services, PGIM India Asset Management Pvt. Ltd. In an interview with LiveMint, Arora says he is cautious about the mid-and small-cap segments in the near term. The broader market may see some time correction in certain pockets.

Edited excerpts:

What is your assessment of the current market structure? What drives FPIs (foreign institutional investors) away from the Indian stock market?

Foreign institutional investors have withdrawn nearly $10 billion from the Indian stock market in October 2024, marking a record high.

FII money has been moving to Chinese stocks, which are relatively cheap even now.

China’s monetary stimulus seems to have made its markets more appealing than India's due to lower valuations.

In addition, the overvaluation of Indian equities, a tepid corporate earnings season, and a stronger dollar impacting emerging markets could be the reasons for the same.

What are your hopes and expectations from the Indian stock market in Samvat 2081?

Globally, the debt-to-GDP ratio has been rising for many countries around the world, leading to limited fiscal flexibility.

Countries with high debt-to-GDP ratios are more vulnerable to rising interest rates.

An increase in interest rates can significantly raise the cost of servicing debt, leading to budget deficits and potentially triggering a debt crisis.

After four consecutive years of healthy double-digit growth, corporate earnings are moderating due to pressure from commodities and fading tailwinds from BFSI asset quality improvements.

The recent print from high-frequency indicators, such as power demand, PMI data, GST collections, and auto sales, also indicates a softening in demand.

The market will continue to find direction based on (1) macroeconomic developments, (2) the direction of bond yields, (3) oil prices and the dollar index, and (4) the Q2FY25 earnings season.

Although India is relatively better placed, valuation is a concern. Hence, we recommend a stock-specific approach.

Will the rally in mid and small-caps continue in the next Samvat, too?

We believe the margin of safety in terms of valuations for mid-cap and small-cap segments at the current levels has reduced as compared to that available in large caps.

We are cautious about this space in the near term.

Keeping this in view, the broader market may see some time correction in certain pockets in the near term, and flows will likely shift to large-caps. In this context, two themes – ‘growth at a reasonable price’ and ‘quality’ look attractive at the current juncture.

What should be our strategy for the next Samvat? Should we trim exposure to equities and diversify into other asset classes?

Asset allocation is the key to creating wealth over a period of time. We believe fixed income, equities, and precious metals should be part of an investor’s portfolio.

The allocation would depend on the risk profile of an investor. Incrementally, precious metals should account for 20 per cent of one’s individual portfolio.

Given that India is the fastest-growing economy in the world, the long-term outlook for Indian equities is strong.

Add to that, the strong balance sheet and stable cash flows lend stability to the growth profile.

At PGIM India PMS, we invest in structurally strong companies, that are termed as good quality companies.

A good quality company is a company that has reached a minimum scale in terms of revenue, has gone through at least one downcycle and emerged as a stronger company, and has a consistency in cash flows and higher return on capital employed over the last 10 years.

Which sectors should we deploy our money for the long term?

We are positive about manufacturing, consumer discretion, quick service restaurants (QSRs), home improvement, and healthcare.

Private sector capex: As the country is seeing strong capacity utilisation, the private sector can leverage its balance sheet to increase capacity as demand starts moving up.

Discretionary Consumption: As the per capita GDP of the country keeps moving up, the demand for discretionary items will continue to remain very strong. Travel, hotels, retail, two-wheelers, four-wheelers, and white goods will continue to see strong demand.

Residential real estate is seeing strong traction across cities, thereby leading to structural demand in the home improvement segment. In addition, there is a strong replacement cycle kicking in on account of the refurbishment of existing homes.

With interest rates coming down, do you think the Indian IT sector's prospects are bright?

US 10-year bond yield has inched up to 4.4 per cent at the time of writing, as against 3.6 per cent on the day of the rate cut by the Fed.

Contrary to expectations, there could be a scenario that future rate cuts would not come in a hurry.

We are cautious about the Indian IT sector, given the uncertain environment in the US regarding the budget allocations to IT by the corporates.

How can the US Presidential election impact the Indian stock market?

It is difficult to take this call given the evolving geopolitical scenario, the tariffs imposed by various governments and the disruption to supply chains given the current war going on in the global context.

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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.