Expert view: Indian stock market inherently strong to sustain gains; look beyond immediate triggers

Expert view: Rahul Singh, CIO-Equities at Tata Asset Management, believes the Indian market has inherent strengths that could sustain gains and hence, investors should look beyond immediate triggers. In an interview with Mint, Singh also shared his views on FII and DII trends and different sectors.

Edited excerpts:

How is the market expected to move in the medium term? Do you think most positives are already discounted, and the market lacks fresh triggers to sustain gains?

India’s GDP growth rate has gone past China’s after many decades. The investment cycle is recovering, the private capex and real estate cycles have improved, and the banking sector is robust. These trends differ from what we are witnessing in developed and other emerging markets.

The potential for India to emerge as one of the important manufacturing hubs with the changed geopolitical landscape post-Covid and post-Ukraine has added an option value to India’s equity valuations.

This, coupled with under-control fiscal and stable external account, has led to a 70-75 per cent valuation premium in India’s PE ratio relative to other emerging markets.

So, while many of these positives are already reflected in current valuations, the Indian market possesses inherent strengths that could sustain these gains.

Investors should remain engaged, looking beyond immediate triggers and focusing on sectors potentially benefiting from structural reforms and government initiatives.

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Why do we see a stark dichotomy in the FII and DII trend? What can attract foreign capital inflow?

The contrast in FII and DII investment trends is influenced by differing economic indicators and interest rate environments globally.

While FIIs have been cautious, influenced by their respective domestic economic concerns and high interest rates globally, DIIs continue to invest due to buoyant economic outlook and tax differential versus debt.

To attract more foreign capital, India needs to continue enhancing its ease of doing business, alongside maintaining a stable fiscal and monetary environment that can instil greater confidence among international investors.

In addition, global rate cuts (as and when they happen) may improve the inflows to emerging markets in general, and India in particular.

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US GDP growth slowed significantly in Q1. How could a slowdown in the US economy impact India?

A slowdown in the US economy poses potential challenges and opportunities for India.

The direct impact could be reduced demand for Indian exports, particularly in sectors directly tied to US economic health, such as IT.

However, India could benefit from lower global commodity prices, which may alleviate inflationary pressures domestically.

The diversified nature of India’s economy and ongoing initiatives to boost self-reliance mitigate the risks associated with a US slowdown.

Do you expect the RBI to cut the rate this year? Why has the elevated rate not disappointed the market?

Given the current economic indicators and inflation levels, there is no immediate or compelling case for the RBI to cut rates ahead of the global move.

The market’s acceptance of higher rates indicates a recognition of their role in maintaining economic stability and controlling inflation.

The focus remains on ensuring these rates support sustainable economic growth without adding undue pressure.

Investors should consider this stability a positive environment for long-term investments, particularly in interest-sensitive sectors.

Also in its first bimonthly meeting, the RBI maintained the real GDP growth forecast at 7 per cent for FY25.

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What is your view on the Indian IT sector after the Q4 numbers? What should be our strategy for the sector?

The Indian IT sector has displayed commendable adaptability in the face of global economic uncertainties; despite facing headwinds from a global economic deceleration, the demand environment is somewhat supported by accelerated digital transformation across industries worldwide.

With an increasing number of companies seeking digital solutions, IT spending could continue to go up structurally. However, global uncertainty over the next six months has led us to be on the sidelines.

Is there more steam left in the PSU banking space?

Public sector banks have shown remarkable improvement, driven by growth recovery and better asset quality.

While the recent rally might lead to some consolidation, the fundamental outlook regarding margins and return on assets appears stable.

What sectors are you positive about for the next one to two years?

The manufacturing and capital goods sectors appear promising, fuelled by government initiatives such as the PLI schemes and substantial infrastructure investments.

The banking sector is also poised for probable growth, potentially benefiting from a healthier credit environment, and valuations are undemanding now.

Also Read: Why are so many Indians piling into stocks?

What could be an ideal portfolio for the next one to two years? Would you suggest increasing exposure to equities?

Firstly, one must note that asset allocation must reflect the market’s reality.

We advise a healthy allocation, say 40 per cent, between Dynamic or multi-asset allocation funds for risk management.

Another 40 per cent can be diversified equity category funds, i.e., a combination of large and mid-cap funds can provide good exposure to India’s fundamentals.

The remaining exposure could be to thematic funds, which could be considered a combination of small-caps, banking, and healthcare.

For the forthcoming one to two years, a portfolio could strategically blend equity and fixed-income assets to optimise returns and minimize volatility.

Within equities, investors may consider a mix of sectors, including those expected to benefit from domestic growth drivers and global economic recovery potentially.

Increasing equity exposure should be done judiciously, considering the investor’s risk tolerance and the macroeconomic environment.

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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.