The recovery in the consumer staples minus discretionary is weak and elusive at this point of time
FinTech BizNews Service
Mumbai, April 17, 2024: ITI Asset Management Company Ltd today said that Indian markets will see a multi-year bull cycle owing to the confluence of macro and micro tailwinds, with 7% GDP growth, moderating inflation prints, range-bound crude prices, easing 10-year G-sec yield, stable currency, and resilient corporate earnings leading the path.
Sectors like general insurance, life insurance, telecom, domestic and global pharma, power and power finance companies and defence will have multi-year growth opportunities in front of them. However, the recovery in the consumer staples minus discretionary is weak and elusive at this point of time, but food delivery and quick commerce companies may do well as they are an emerging business, although profitability needs to be factored in.
For sustained valuations and market growth, earnings growth trajectory, capex, policy initiatives like PLI, etc., Lok Sabha election outcome, and the timing and quantum of interest rate easing globally will be closely monitored.
Rajesh Bhatia, CIO, ITI MF, said, “We are at an early stage of economic cycle unlike in 2003-07 wherein markets were in late stage of valuation cycle and economic cycle and they corrected sharply. We continue to believe that the investment environment going forward will be a stock picker’s market. There could be instances where companies operating in the same sector may end up reporting a diverse set of financial results. Our approach in such an environment would be the same as what we have been following over the last few quarters. It would revolve around the thesis of identifying companies based on the “bottom up” approach."
Going forward, the focus would be on the demand scenario in rural areas, as the rural segment continues to be weak on account of a lower than expected monsoon. While there are nascent indications of rural demand bottoming out, it is too early to call out a recovery for certain. Also, the upcoming elections and the phase of government formation may lead to some delay in the announcement and ordering of various projects and equipment. Stability and continuation of policy post-elections would augur very well for our markets despite any short-term volatility.
The Nifty-50 index was up 2% MoM in March-24 and closed FY24 with a stellar return of 29%. But in March-24, returns were muted for the NSE Mid cap 100 and NSE Small cap 100, and they were down 1% and 4%, respectively, though in FY24 they were up 60% and 70%, respectively.
Indian stocks have outperformed global and EM (Emerging Market) equities over 5Y and 10Y periods (in US$ terms), lagging only the US. Over the past year, they have outperformed the US too. Remarkably, the growth has been meaningfully more broad-based than in the US, which has been dominated by the 'magnificent seven’. Hence, the quality of the Indian market rally in terms of being more corporate performance oriented and broad based is a source of comfort, as is highlighted by the point below:
525 US$ 1 billion+ stocks (>5% of global count), vs. <300 pre-covid.
Stable quarterly earnings season required to support valuations
Nifty 50 has reported ~19% YoY EPS (Earnings Per Share) growth in 9M FY24 (first 9 months of Financial Year 2024), and implied growth for Q4FY24 (Quarter 4) is ~7% YoY (Year on Year). FY25 EPS growth expectation is ~15% YoY.
The structural positive macro view remains intact:
Healthy GDP growth: Real GDP growth crossed 8% for the third successive quarter in 3Q FY24 vs. 8.1% (revised higher from 7.6%) in 2QFY24 and 4.3% in 3QFY23 (revised lower from 4.8%).
The revised fiscal deficit target should be met: The surge in government direct tax collections in August– February'24 is likely to offset the shortfall from indirect tax collections and higher spending on food and fertilizer subsidies.
State capex pick-up: Following in the footsteps of the Centre, the combined capex of 17 major states (~80% of the total capex by all the states) sharply grew by 34% YoY to Rs 4.8 trillion during 11M FY24 vs. Rs 3.6 trillion in 11M FY23 and Rs 2.7 trillion in 11M FY20 (pre-covid period). Notably, this marks the highest level of capex these states have ever seen in the first eleven months of any fiscal year. The strong capex momentum can continue in FY25, as the states’ fiscal position is quite comfortable. This trend is positive for cement demand, construction companies' payment cycles, and companies’ order books, and it contributes towards spurring rural demand revival.
Private investment cycle recovery will be key: Capex increased 26% in FY23, and private capital projects ordered in 9M FY24 increased by 33% YoY.
Interest rate reductions should commence in 2HCY24 (2nd half of calendar year 2024): US Federal Reserve officials plan to reduce key interest rates three times in 2024 despite higher inflation, though the quantum and the beginning of the same are not yet certain. However, it's likely that the interest rate cycle has peaked.
Global View
FED, in its policy meet in March-24, has maintained its stance of 3 rate cut in CY24, with expectations of falling inflation in CY24. But importantly, it has increased the CY24 USD GDP (Gross Domestic Product) growth rate to 2.1% versus its December-23 guidance of 1.4.
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