Risk appetite for Indian equities has reduced: Axis Securities PMS CIO

The markets are currently experiencing a technical correction due to global factors and domestic issues, including subpar earnings reports. While the overall trajectory of earnings growth has not changed significantly, the risk appetite for Indian equities has reduced notably for several reasons. A key factor contributing to this decline is the supply of equities from promoter entities, including initial public offerings. Since markets operate on the principles of supply and demand, a higher supply leads to higher pressure on prices in the short term. Nonetheless, the market valuations have become reasonable, and the second half of FY25 is expected to perform significantly better than the first half. The current conditions not only provide a layer of downside protection but also present substantial upside potential. Therefore, now is a good time to consider investing.

The market breadth has narrowed significantly. The percentage of stocks trading above the 200-day moving average has decreased markedly from 90 per cent to well below the long-term average of 53 per cent. Currently, less than 5 per cent of stocks are trading near their 52-week highs. This generally indicates a positive technical signal that a market correction may be coming to an end. More importantly, a correction of more than 20 per cent in over 50 per cent of the stocks is a good sign of froth going out of the market. Thus, valuations are now in a reasonable zone across categories. Even small-cap valuations are more reasonable, and there are a decent number of opportunities compared to three months ago. Consequently, the broader market is starting to look more attractive.

There are several reasons for this theme, but the most critical one is the miss in quarterly earnings, which has led to a consensus reduction of estimates by 3-4 per cent. While a 3-4 per cent decrease may not seem significant, it comes alongside already expensive valuations, resulting in considerable outflows. Therefore, the combination of high valuations and a loss of earnings momentum are the key factors at play. However, we can expect earnings momentum to improve over the next six months.

The outcome of the US election will significantly impact global equity markets in the coming months. The Trump administration is expected to differ from the previous four years. Initially, we may see a stronger dollar; however, in the medium term, there will likely be substantial changes that could lead to higher inflation and an increased US GDP growth rate. Oil prices are expected to decline. Overall, many factors seem favourable for Indian equities over the long term.

Due to the recent rise in inflation, which is expected to take some time to stabilise, a rate cut is unlikely in the near term. Additionally, the transmission mechanism is relatively weak, so we may not see a rate cut anytime soon.

The PMS industry, similar to the mutual fund sector, has experienced consistent inflows. However, these inflows are gradually declining as market corrections cause investors to feel uncertain. This trend may shift in December as seasonal volatility decreases and the market could stabilise.

The earnings season for the second quarter was notably weak, with more companies falling short of expectations than those that met them. Overall, the consensus has seen a cut in estimates by 3.5 per cent for FY25, which has resulted in slower earnings growth. Overall, the first half of FY25 was weak, and the second half should be stronger.

Public sector undertakings have lagged after the general elections, but they have delivered decent results, making the PSU space appealing. The capital goods and industrials sector experienced a weaker first half of the year. However, order flows have been strong, indicating a significant improvement in the earnings trajectory ahead. Banks have reported sluggish performance this quarter, with only a few exceptions. We believe the challenging phase is behind us for this sector, as issues related to credit costs and other operational parameters should improve moving forward. The pharmaceuticals sector has been one of the strongest performers this fiscal year and is expected to continue doing well. The IT sector presents a mixed outlook; we do not anticipate any positive surprises, leading us to maintain a neutral view of this sector.