Long-term investors should stay steady ahead of Budget; 2024-end target for Nifty is 25k, says Nishit Master of Axis Sec

Now that the 2024 Lok Sabha elections have ended with Modi-led NDA forming the government for the third straight term, the focus has shifted to the upcoming Union Budget for the financial year 2024-25. Recommending a market strategy, Nishit Master, Portfolio Manager at Axis Securities, in an interview, advised long-term investors to not make any preparatory changes to their portfolios based on their expectations from the Budget. Master also highlighted that Axis Securities' 2024-end target for Nifty50 is 25,000, which means, they expect low single-digit returns from the market. 

Edited Excerpts:

How should one trade on budget day?

After the implementation of GST, the Budget has become less critical in determining indirect taxes, as these are now set by the GST council rather than within the Budget. Now, the Budget mainly highlights the government's priority areas for spending, the fiscal health of the Union government, and the potential impact of the government's borrowing program. On Budget day, one can take long-term positions in sectors that the government prioritises for spending and where significant growth is expected in terms of allocation. Based on market participants' expectations, short-term trades related to the Budget will likely occur before the Budget. Traders may unwind their trades on the day of the Budget (sell on the news).

Which sectors should investors focus on around the Budget?

We anticipate that the current government will maintain its emphasis on infrastructure development, which should be advantageous for capital goods and construction companies. Additionally, we expect defence spending to remain elevated, with a continued emphasis on "Make in India" for the procurement of defence equipment, benefiting Indian defence companies. We believe that the government will persist in its efforts towards fiscal consolidation, potentially leading to lower yields going forward. This may have a marginal positive impact on non-banking financial companies (NBFCs) and banks.

Do you expect any major announcement from the Budget?

We do not anticipate any groundbreaking announcements in this Budget. It will continue the previous priorities and policies, which is what investors expect.

How should investors position their portfolios to prepare for the upcoming Budget?

We don't think long-term investors should make any preparatory changes to their portfolios based on their expectations from the Budget. Once the government clearly spells out its priorities, long-term investors can incrementally invest in sectors that can benefit from them.

Do you expect the market to consolidate from now till the end of 2024? Or are there more peaks to be hit?

Our year-end Nifty50 target is 25,000, which means we expect low single-digit returns for the rest of the year.

What investment strategy should long-term investors follow amid these lofty valuations?

Though valuations are high compared to historical averages, a part of premium valuations can be explained by higher RoEs, better growth prospects, and a more extensive scale of operations of Indian companies vs. history. For long-term investors, it still makes a lot of sense to invest in Indian equity markets, which can give superior returns compared to other asset classes despite higher valuation. Investors should focus on high-quality companies with a proven ability to generate consistent free cash flow rather than getting caught up in low-quality companies or sectors that are currently attractive but lack a demonstrated history of value creation for minority investors.

Why have the mid and small-cap stocks been soaring despite not having enough fundamental strength? Should one buy them or stay cautious?

One crucial variable we closely track is Return on Equity (RoE). When we compare the RoEs of the small-cap index and mid-cap index with the Nifty50 index, we can see that they have now almost reached parity, which was not the case earlier. This means that small and mid-size companies, at an index level, are almost as efficient in utilising capital as large-cap companies. This is one of the reasons for the outperformance of mid and smallcaps. Another reason is the expectation of higher earnings growth for small and mid-cap companies in general compared to large-cap companies. On the flip side, there are enough small and mid-cap companies that lack adequate financial strength or have a fairly weak business model but are trading at lofty valuations because of some story that has caught up investor frenzy.

Therefore, rather than looking at small and midcaps as one group, it's better to evaluate each and every company on its own merit and decide whether to invest based on its fundamental strengths and valuations.

Do you see FPI inflows similar to 2023 or will outflows continue further?

It is tough to predict FPI inflows because they depend on many factors, some of which are not linked to the strength of the Indian economy or its valuation. However, in the long term, we believe that FPIs cannot continue to ignore India. This is because India is still the fastest-growing major economy globally and offers tremendous opportunities to create wealth for FPIs.

One piece of advice for new investors?

It's important to refrain from investing based on rumours about companies with no proven track record of creating long-term wealth for investors. Investing based on a business's fundamental strength is always safer and wiser. Additionally, it's important to be more cautious about expected returns in the future because we are coming from a high base.