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In an interview with ETMarkets, Sood said: “We anticipate that earnings growth in the broader market, particularly among Nifty50 companies, will compound at a rate of 12-14% CAGR over the period spanning FY24-26,”. Edited excerpts:
As we step into FY25 – how do you see markets in the next financial year? Do you see a double-digit return?
Aditya Sood: India’s decent macro-economic fundamentals, strong expectations of lower global interest rates on the back of declining headline & core inflation in major economies and reduced election risk after the BJP’s strong performance in recent state elections may keep the Indian market’s valuation at elevated level.
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In our view, it would be best to enter 2024 with low return expectations from the market. Entry P/E multiples 22.2x FY26 remain slightly higher than 3-and-5-year average multiples.
Market return is going to be a function of earnings growth rather than multiple expansion. We expect earnings growth of low double digit CAGR in the Nifty although small and midcap earnings growth would be high teens.
In terms of earnings – how do you see India Inc. faring in FY25. P/E multiple has expanded but there is a lot of catch-up which earnings have to do. Do you see earnings recovery in FY25 especially in the small & midcaps space?
Aditya Sood: We anticipate that earnings growth in the broader market, particularly among Nifty50 companies, will compound at a rate of 12-14% CAGR over the period spanning FY24-26.
Mid and small-cap companies tend to exhibit higher sensitivity to fluctuations in the cost of capital and interest rates within the economy.However, we anticipate a moderation in both interest rates and risk premiums in the near term, which should provide support for earnings momentum.The disproportionate allocation of funds to small and mid-cap stocks has significantly contributed to their outperformance in FY24.
Despite recent corrections, the Mid Cap index continues to maintain a premium over the Nifty, currently standing at 22% compared to a 10-year average of 14%.
Given the historical lack of liquidity in these stocks, premiums have a tendency to correct rapidly.
If someone with a high-risk profile plans to deploy Rs 10 Lakh in FY25 – what would be the ideal sectoral allocation in his/her equity portfolio?
Aditya Sood: We are positive on the prospects of Autos & Auto Ancillary – both passenger cars and two wheelers. Passenger vehicle volumes have recovered on account of premiumisation.2 wheeler volumes are bouncing back to pre-covid levels.
Within consumption we like consumer staples as a category especially companies which are more tier II and tier III focussed.
Consumer durables wherein we expect volumes returning to pre covid levels on account of ending the destocking cycle.
We prefer to be underweight on financial stocks both banks and NBFCs on account of slowdown of loan growth, compression in NIMs and risk of increasing retail loans slippages.
How are you looking for Gold in the next FY?
Aditya Sood: Gold has a key role as a strategic long-term investment and as a mainstay allocation in a well-diversified portfolio.
Gold has historically provided returns, diversification and liquidity. Gold is a complement to equities and broad-based portfolios.
These characteristics combined mean that gold can materially enhance a portfolio’s risk-adjusted returns. Gold prices have been rising amid expectations of Fed rate cuts and its safe-haven allure.
Declining yields on US government bonds tend to boost the demand for non-yielding assets such as gold. Fundamentals point to continuing strength, but valuations are high, which could lead to some near-term volatility.
Gold should be looked at as a hedge against inflation and a protection against devaluation of the INR vis-à-vis the USD, over the medium term high single digit to low double-digit returns can be expected from gold.
What would be the ideal asset allocation looking at the domestic and global factors in the next financial year assuming someone is in the age bracket of 30-40 years?
Aditya Sood: The importance of asset allocation increases in times of uncertainty. In times of market volatility, investors tend to increase their allocation to safe haven assets such as gold, and with interest rates also rising, investors will be looking to increase their allocation to fixed income assets due to the rise in yields.
In an ideal scenario one should have 40-50 percent allocation to equities, 25-30 percent allocation to fixed income, 10 percent allocation to gold and the rest to real estate.
FIIs took a back seat in FY24 – how do you see foreign investors positioning themselves in FY25? What is holding them back?
Aditya Sood: India is expected to maintain its status as a top investment destination for foreign investor for FY2025 due to several factors, firstly, India’s robust economic growth positions it as one of the fastest-growing economies globally, potentially yielding high corporate earnings.
Secondly, the possibility of interest rates being reduced in the coming financial year is good news for consumer spending, which could boost overall market sentiment.
As a global emerging market asset allocator, election cycles play a very important role in allocation of capital on account of geopolitics and view on the currency of a country.
Once we have a decisive mandate which translates into continuity of reforms, flows are expected to accelerate.
Will FY25 be another blockbuster year for IPOs? We saw many SME IPOs but not many mainboard IPOs hitting D-Street. Any specific reason for this mismatch?
Aditya Sood: In FY24, there was a significant uptick in IPOs with 75 mainboard IPOs launched compared to 37 in FY23, marking the highest number in two years.
Additionally, 200 SME IPOs were launched, up from 125 in 2023. This heightened activity in the primary market was fuelled by strong demand for equities, driven by an increasing number of domestic investors and strong listing gains.
Many SMEs are opting for IPOs due to the flourishing equity market and the necessity for growth capital. This allows them to access funds at favorable valuations.
There is a lot of talk around valuations which have turned slightly expensive compared to peers. Is that something that is a sign of caution for investors in the new FY?
Aditya Sood: India is recognized as one of the premier investment destinations for numerous foreign fund managers. However, one factor that restrains them from fully committing to local equities is the elevated valuations.
India’s stock market has a two decade history of trading at premium valuations to the emerging market counterparts which can be justified by superior ROE profile of Indian corporates coupled with high growth potential over the next decade.
(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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