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In an interview with ETMarkets, Reddy said: “We remain optimistic on the 1) pharmaceutical sector, particularly companies involved in exports of generic medicines on the back of improved pricing environment in the key US market,”. Edited excerpts:
We have closed FY24 with double-digit gains. How do you see markets in FY25?
Sampath Reddy: The Indian equity markets have fared well in FY24 and have been one of the top-performing markets over the medium to long term as well.
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This has been helped by strong macro fundamentals for India, better-than-expected earnings growth, strong institutional flows (both foreign and domestic), and a stable government and policy environment.
However, with the strong outperformance of Indian markets the valuations have also risen above the long-term average and not looking as attractive as before, especially in certain pockets of the market.
Therefore, we expect that equity returns maybe a bit subdued in FY25 compared to FY24, even though the long-term India growth story remains intact.
How should one place themselves in the small & midcap space in FY25?
Sampath Reddy: The small/mid-cap segment has significantly outperformed the large-cap segment over the past year or so, despite the recent correction.This has been helped by strong inflows into mid-cap and especially small-cap mutual funds. Meanwhile, the large-cap mutual fund category has seen net outflow over the past year.The number of folios has also grown significantly in the small/mid-cap category, and the small-cap category now has the highest number of mutual fund folios (within equity MF categories) at 1.87 crore folios in Feb 2024, as per AMFI data. This indicates substantial retail investor traction, especially for small-cap funds.
With the sharp outperformance of the broader markets, the valuations in the small/mid-cap segment have become quite expensive.
We have been suggesting to customers in our investment communication that we prefer large-caps compared to small/mid-caps over the past few months and continue with that stance.
Recently, SEBI has also asked mutual funds to stress-test their small/mid-cap MF schemes and publish the results.
Any sectors that could turn out to be the dark horse in the next 12 months?
Sampath Reddy: We remain optimistic about the 1) pharmaceutical sector, particularly companies involved in exports of generic medicines on the back of an improved pricing environment in the key US market.
This sector appears to be entering a profitable growth phase, driven by factors like increasing demand from emerging markets and favourable regulatory changes.
We are also watching the 2) consumption & QSR (Quick Service Restaurants) space closely as key stocks in this sector have undergone reasonable time correction.
We have been positive on QSR due to the long term discretionary and consumption potential in India, as the economy grows.
However, for consumer and especially QSR sectors, both earnings growth and volume growth has been muted over the past few quarters.
But, with the stock underperformance in these sectors, valuations are now starting to look quite attractive, and we are getting quality franchises with long-term growth potential at a reasonable price.
A revival in rural demand and consumer discretionary spending can provide catalyst for the growth and stock price performance of these companies.
Finally, the 3) financial sector, specifically private sector banks, should not be overlooked. With these banks having underperformed recently their valuations are quite reasonable.
Considering the potential for economic growth and increased lending activity, private sector banks could offer good value for investors.
Election will start in April – are there any sectors that have done well post the event (historical perspective)?
Sampath Reddy: Generally, before general elections, government expenditure and infrastructure spending are postponed or reduced.
So, after the elections, capex and infrastructure-related spending tends to pick up and will also benefit sectors like engineering, cement, metals etc.
The capex cycle is recovering in India and has been led by government spending. But as the economic growth picks-up, the system level capacity utilization rates are also increasing, which would drive private sector capex going ahead.
Crude oil has been inching higher so far in 2024. Do you see the trend as a worry for Indian markets in FY25?
Sampath Reddy: Yes, Brent crude oil prices have risen from a low of around $73/bbl in Dec 2023 to around $86/bbl presently. This is still manageable and doesn’t pose a large risk for India.
However, if crude oil crosses the $100/bbl mark, then it becomes a considerable risk for a large net oil importer like India, and also has negative impact on our current account balance.
With some global growth slowdown expected, crude oil prices may not see a significant spike.
But any geo-political events/ tensions, that are difficult to predict, can lead to a spike in crude oil prices, and therefore need to be tracked closely.
Japan ends a 17-year run of negative interest rates and the US Fed kept rates status-quo – what does the central bank’s rate action tell us about future rate trajectory?
Sampath Reddy: Yes, the Bank of Japan (BoJ) brought its Negative Interest Rate Policy (NIRP) to an end in its recent monetary policy meet.
The central bank had been using this policy along with asset purchases to deal with deflation over the years.
However, with inflation picking up, the BoJ now believes that the likelihood of achieving its 2% inflation target sustainably, is gradually rising.
The central bank raised the short-term interest rate from a band of -0.1% to 0% to a band of 0% to 0.1%. For long-term interest rates, the BoJ announced that it will abandon its Yield Curve Control Policy, which was introduced in 2016 to keep the 10-year Japanese government yield around 0%. It would also end purchases of Japanese ETFs and REITS.
With this change in monetary policy, we could see some unwinding of the Yen carry trade—where global investors borrow at low or zero rates from Japan and invest in other global markets.
What is the biggest risk that you see for markets in FY25 that could derail the bull party?
Sampath Reddy: Presently, market valuations would be one of the key risks for Indian markets, which could lead it to give relatively subdued returns in FY25.
As mentioned before, large-cap valuations are elevated, and expensive for the broader markets and certain sectors.
If any global risk aversion happens then that can have an impact on Indian markets, especially with its significant outperformance.
The other risk is corporate earnings. India’s market rally has been supported by strong and better than expected corporate earnings.
Broadly the market returns have tracked corporate earnings growth over the past few years.
Earnings growth is expected to slow down in FY25/26, but any major negative surprise will have an adverse impact on the markets where valuations are already a bit steep.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
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