Expert view: Dhiraj Relli, the MD and CEO of HDFC Securities, recently discussed with Mint how India is expected to continue drawing foreign investment in the long term, as well as the market sentiment during this Diwali season. Relli also touched on how Donald Trump's victory and Kamala Harris' win could influence India's trade relations. When discussing long-term investment opportunities, he recommends that areas like Financials, Pharmaceuticals, and Railways/Infrastructure are solid choices for investing over an extended period.
Stock prices are slaves to earnings in the long run. It is the profit performance of companies that drive stocks to appreciate. Strong corporate earnings growth of more than 20% CAGR in the last four years coupled with strong flows from retail investors into equity markets have resulted in across the board re-rating of stocks and have generated fantastic returns for the investors.
FY25 will be the first year of a single-digit growth in the last five years. Despite modest earnings growth expectations, the Nifty 50 index soared by over 30% by early October. However, lower-than-anticipated Q2 FY25 earnings and cautious remarks from various management teams are prompting investors to adjust to new reality.
As benchmark indices were richly valued compared to their historical valuations and then prevailing stock prices across different sectors offered low margin of safety, we have been cautioning investors to temper their returns expectations this year.
Improved performance of industrial sector, upturn in investment activity, above normal monsoon, pick up in rural demand, high-capacity utilisation, healthy balance sheets of banks and corporates, and the government’s continued thrust on infrastructure spending augur well for the GDP growth in the second half of this year and the next financial year.
Despite short term headwinds, superior growth prospects of India are likely to continue attracting foreign flows in the long run. India’s weight in global indices has been rising sharply over the past few years and continued performance will attract higher attention and allocation from large global funds.
As we approach this Diwali, the sentiment on the street is subdued but we firmly believe that bottom-up stock picking and sector specific opportunities will continue to rewards investors next Diwali as well.
The 2024 United States presidential election is set to be held on Tuesday, November 5, 2024.
As a major economic and military power, the United States policies and strategies could impact global markets, especially in defence and trade. Global Investors may react to new economic, tax, or trade policies that could affect corporate earnings post the decision on who will be the 47 th President of the United States.
The market tends to experience heightened volatility due to potential changes in policies and regulations in the presidential election year. Government spending and fiscal measures influence sectors differently, creating sector-specific risks.
The newly elected US President's economic policies will directly affect India’s exports and investment flows and strategic relations between the two countries. If Kamala Harris becomes president, she may carry forward most of the trade policies of the Biden administration. On the other hand, Donald Trump may pursue a more transactional approach with greater scrutiny of the trade imbalance and migration.
After a sharp 30% spike in China’s markets, its weights catapulted in global and emerging indices and galvanized huge inflows from passive funds into that country from many markets across the globe, including India.
The record FII outflows are driven not only by the shift towards China, but also due to rising inflation and underperformance by index heavyweights. India’s 5.49% retail inflation in September was the highest seen this year, which dampened investor sentiments.
Domestic institutional investors have purchased over $8 billion worth of shares in October alone, nearly matching the foreign outflows. This new found stability reflects a maturing market ecosystem where domestic participants increasingly hold the power to counter foreign selling pressures.
The US election outcome, geo-political developments in the Middle East, and central bank policies will all play crucial roles in determining the direction of global capital flows.
India has a solid macro growth story and remains the fastest growing major economy in the world. We believe recent flows into China is due to technical reasons and more of a tactical call looking to capitalise on the country’s stimulus measures, while India remains a long term-structural growth story.
It is the inherent nature of equity markets to be volatile. During the times if heightened volatility, many investors lose track of the long term and get swayed by shot term gyrations and take decision based on emotions. Number of new investors panicked by volatility start doubting their investment strategy. Every investor whether new or seasoned needs to learn digest the market volatility, which is unavoidable.
Lackluster Q2FY25 earnings, significant selling by foreign portfolio investors (FPIs), ongoing geopolitical tensions, a strong dollar, consecutive Chinese stimulus announcements, and the uncertainties on account of impending US elections are fuelling the volatility.
The Nifty 50 has already seen an 8% decline from its all-time highs, reflecting the prevailing downbeat sentiment in the domestic market. Even after this correction, indices are trading at around 20 times forward earnings, which is at a notable premium. Recent Q2 earnings on have fallen short of market expectations, leading to forecast downgrades and raising concerns about further moderation as earnings adjust.
Short term traders and new investors must be mindful of the risks and adjust their equity exposure according to their risk appetite and as per their asset allocation plan. Patient long-term investors, who have surplus cash can take advantage of this dip to buy into quality stocks in a staggered way via SIPs.
Valuations of the sector is currently at reasonable levels. Financial inclusion efforts and technology adoption are also transforming rural and underserved areas, presenting new growth avenues for the sector. We find this sector is most reasonable valued and as the RBI starts cutting interest rates early in the next calendar year, cost of capital for the sector will come down leading to higher credit growth.
Indian Pharmaceutical Market (IPM) reported robust growth for first half of the year, led by primarily by price increases. We expect IPM growth to remain steady at 8-10% over the next few years, with companies boasting strong franchises and brands likely to see faster growth.
We like domestically-focused/diversified companies due to their strong pricing power, better margin profile, and cash rich B/S and strong return ratios, which led to rerating among domestic peers.
Balance sheets of most pharma companies are cash-rich and debt-free, offering room for investments in the international markets. India business provide sustainable secular growth for the companies.
Indian pharma companies have been investing in categories including biosimilar, innovator and patented products, complex injectables, and this would drive growth in the international business over the long term.
Infrastructure sector enjoyed tailwinds and healthy order book given government’s focus.
There have been massive investments in Railways and Defence in the past few years and that is likely to continue in the medium term. Indian players have also tie-up with global majors and that too augurs well for this sector.
Strong focus on affordable housing, Smart Cities Mission and industrial corridors coupled with expected pick-up in private players’ capex may translate into robust inflows for players over the medium to long term.
Annual order book to sales is at around 2-2.5x of annual sales for the companies, which provide visibility for the next 2-3 years. Balance sheet have also improved led by better W/C cycle for many players.
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 decision.
