After a highly narrative-driven market over the last 18-24 months, alpha generation will be increasingly driven by stock selection rather than sector selection, says Rahul Singh, CIO-Equities, Tata Asset Management. Singh believes that improved earnings visibility, moderation in IPO activity and positive macro developments will be key to attract overseas flows. Edited excerpts:
What is your outlook for Indian equities?
Supportive macro parameters such as a manageable current account deficit and controlled oil prices continue to be positive for Indian equities. These factors have helped sustain valuations, with the Nifty currently trading at around 21 times one-year forward earnings.
Earnings growth for this fiscal, however, has been disappointing, with some downward revisions. We might end up with only a 5-6 per cent earnings growth rate for the Nifty 50 companies. This remains a concern.
Both these factors may end up balancing each other out which may lead to a consolidation phase in the markets. After a highly narrative-driven market over the last 18-24 months, we are likely to see a shift towards a more bottom-up, range-bound environment. In this phase, alpha generation will be increasingly driven by stock selection rather than sector selection.
What is your take on valuations at this point in time?
Currently, midcaps are trading at a rich premium vis-a-vis large caps, which makes large caps relatively more favourable from a valuation perspective. Large caps offer a more attractive risk-reward profile not just from an asset class standpoint but also within specific sectors.
It’s more important to look at a sectoral perspective. In the last 18-24 months, sectors such as defence, manufacturing, power, capital goods and real estate have performed exceptionally well. Some of these sectors may now undergo a time correction, a price correction or both. Sectors where we find comfort in valuations and see continued earnings momentum include banking and pharma.
India saw FPI outflows of over $10 billion in October. What are the key triggers that will drive flows?
The main trigger for the FPI outflows has been India’s relatively high valuations compared to China. With China’s recent stimulus package and other measures providing a floor to its market, investors began to recognise the valuation gap between India and China, which has driven a shift in flows. Additionally, the recent earnings season has not been very inspiring, with some earnings cuts both within the Nifty and outside it, further impacting sentiment. A third contributing factor is the rich pipeline of IPOs and other issuances in India, which is creating additional supply through new fundraising.
Improved earnings visibility, moderation in IPO activity and positive macro developments could make Indian markets relatively more attractive again.
Domestic inflows have remained resilient throughout the past many months. What are the factors driving retail money into MFs and will this trend continue?
The factors driving retail money into mutual funds are the same as we’ve seen before, with no significant new drivers. The shift toward equities, increasing acceptance of equity as an asset class, and favourable tax structure compared to other asset classes have all supported this trend. These elements continue to contribute to the resilience in domestic inflows, particularly through systematic investment plans (SIPs), which have consistently garnered over ₹20,000 crore this year.
A lot of this money is flowing into small cap and thematic funds — is that a concern?
I do not anticipate this trend continuing over the long term. In my view, the thematic and small-cap inflows might largely stabilise. Going forward, I expect the market to take a more bottom-up approach. While certain themes such as manufacturing, capital goods and real estate may remain appealing from a long term perspective, investments in these areas may likely require a selective and stock-specific approach.
What is your view on the earnings season?
The Q1 earnings season revealed mixed results. Consumer segments, both discretionary and non-discretionary, have shown negative trends, which is concerning. However, large banks have shown stable to positive, albeit modest, growth. As we move forward into the remainder of FY25, the commentary around consumption remains cautious, and the recovery is expected to be slow and gradual, particularly within consumer-related sectors. Banking, on the other hand, may experience sequential improvements quarter-over-quarter, but overall, we anticipate a mixed performance across sectors. For the cyclical sectors, successful execution may be critical in sustaining growth.