Returns may moderate as earnings growth slows to less than 15 per cent this year, says Ashish Gupta, CIO, Axis AMC. In an interview with businessline, Gupta says interest rate cuts in India could be shallower than the US, leading to more FPI flows. Excerpts:
What is your outlook for Indian equities?
The last one year has seen substantial gains in the markets and all indices have touched lifetime highs. One can expect bouts of consolidation going forward given that the important triggers of this year – elections and budget – have passed.
Looking ahead, slowing global growth, the outcome of US presidential elections and global geopolitics could be the likely triggers for the markets in addition to increased equity supply from promoters, private equity players and the large pipeline of IPOs. With earnings growth this year expected to slow to less than 15 per cent compared to 24 per cent CAGR in the past three years, we expect market returns to also moderate. The interest rate cut by RBI will be beneficial for interest rate sensitive sectors.
What is your take on valuations at this point in time?
Valuations are definitely expensive compared to their long-term averages across market caps, but this is more noticeable in the mid- and small-cap segments. To that extent, large-caps seem more favourable. However, we do find pockets of opportunities across the capitalisation.
What is the outlook for FPI flows going forward?
Unlike 2023 that saw inflows to the tune of $20 billion, FPI flows have been negative in some of the months and the total inflows so far amount to a mere $1.7 billion. However, given India’s goldilocks scenario of robust growth and tame inflation, we do believe that FPI flows could pick up soon. The key trigger for the US markets will be the presidential elections.
Do you think we are at the end of the global interest rate tightening cycle?
After staying higher for longer, one can look forward to lower interest rates in the near term. We have seen the central banks of Canada, Switzerland and Europe lower interest rates and expect that the US Federal Reserve too would lower rates in its September policy.
In fact, the interest rate futures is already pricing in around 100 bps of rate cuts. In India, we expect the central bank to lower rates by 50 bps in this rate cycle. However, unlike the US, interest rate cuts in India could be shallow and the differential will lead to more inflows from FPIs.
Domestic flows have remained resilient for many months. What are the factors driving retail money into MFs and will this trend continue?
It’s encouraging to see that retail investors today are more sophisticated and invest with conviction. In recent years, there’s been a consistent trend of equity investments, with a significant amount being channelled through systematic investment plans (SIPs). This shift towards a disciplined approach, rather than trying to time the market with lump sum investments is noteworthy.
Currently, SIP inflows stand at an impressive ₹23,000 crore, reflecting a strong preference for regular, planned investments. What I find heartening is that people have started viewing equity as a superior long-term investment vehicle. Even when valuations were lower last year or during market pullbacks, SIP flows surpassed lump-sum investments. As one of the fastest-growing economies globally, this trend will likely continue.
A lot of this money is flowing into small cap and thematic fund — Is that a concern?
The sectoral/thematic category saw inflows of over ₹18,000 crore in July. In the last one year we have seen many NFOs being launched in this space. Investors’ investment strategy should aligns with their risk tolerance, objectives, and investment horizon. Invest across categories and even in thematic funds but be aware of the risks associated with these categories, as thematic funds can be cyclical in nature.
What is your view on Q1 earnings? What is your take on earnings growth for India Inc for the rest of FY25, given the global slowdown?
After the earnings upgrades seen in the last few quarters, we have seen cuts come across all forward estimates. Earnings growth itself remained weak in Q1, with overall revenue growing at just 8 per cent, despite weak base quarter as well. EBIT growth slowed to about 4 per cent. PAT growth was close to zero. Weak earnings of OMCs has tempered overall earnings growth, while auto, telecom, real estate and telecom reported improved earnings.
Could you talk about a few sectors that you find favourable right now and the reasons for the same?
We are positive on consumption and believe that improving rural demand coupled with the government’s initiatives on upskilling the youth can boost demand in the longer run. A good monsoon will add to better crops and lower inflation. The trend of premiumisation continues, benefiting various segments within consumer discretionary. Automobiles, real estate, and high-end retail have all experienced growth.
Separately, the housing sector is witnessing increased absorption across India, and with the government’s emphasis on affordable housing, real estate, building materials and related industries are poised to benefit. We are positive on sectors such as manufacturing, utilities, infrastructure, pharmaceuticals but underweight the exports segment.
What are your thoughts on IT, pharma and banking?
Asset quality trends have been mixed for lenders. While corporate asset quality continues to be robust and many lenders are still seeing strong recoveries, there has been an increase in delinquencies in unsecured consumer loans and microfinance segments. This has resulted in a rise in credit costs for both banks and NBFCs. However, particularly for the banks, these are a small component of loan books and therefore credit costs are still less than 1 per cent for most of the banks.
NBFCs that have a larger share of unsecured consumer loans and microfinance companies are likely to see elevated credit costs for a few more quarters. With regards to pharma, both the US generics business and domestic formulations have been driving growth while in technology stocks we expect sluggish growth to bottom out in the next few quarters.
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