2 hours Ago
The market is shifting its preference towards stocks/sectors with strong earnings visibility, defensive names and relative underperformers of the past year, says Vrijesh Kasera , Fund Manager - Equity, Mirae Asset Investment Managers. "We see higher preference for consumer discretionary while at the margin some staples also look good specially as a hedge against any market correction. With the US rates easing, discretionary demand is expected to pick there, thus providing Indian IT some tailwinds," he says.
Edited excerpts from a chat with the fund manager: Do you think it is the right time to start selectively picking rail and defence stocks which have seen a lot of correction in recent weeks? Despite the correction in recent weeks, and expectations of government capex revival in H2FY25 and considering the additional fiscal room we may have at the end of FY25, we could see a strong FY26 in terms of govt capex. The sharp run-up in these stocks and the stretched valuation continue to be a concern. The aggregate defence and railways stocks’ market cap has gone up by 56% CAGR (after factoring in the recent correction) from Rs 1.
2 trillion in FY19 to Rs 14.2 trillion currently. Thus, the combined market cap has gone up by 11.
5x in the last 5 years, while the combined profits for the sector have gone up by only 2.6x, from Rs 119 billion in FY19 to Rs 304 billion in FY24. Consequently, the combined trailing P/E ratio has expanded 5x, from ~10 in FY19 to ~47 at current prices.
The market cap for the two sectors peaked in July ‘24 at Rs 18.2 trillion. Since then, there has been a correction of 22% at the aggregate level but the current valuations still call for being very selective in deploying fresh money even as the structural case for these names stay strong.
Stock Trading Dow Theory Made Easy By - Vishal Mehta, Independent Systematic Trader View Program Stock Trading RSI Made Easy: RSI Trading Course By - Souradeep Dey, Equity and Commodity Trader, Trainer View Program Stock Trading Commodity Markets Made Easy: Commodity Trading Course By - elearnmarkets, Financial Education by StockEdge View Program Stock Trading Technical Trading Made Easy: Online Certification Course By - Souradeep Dey, Equity and Commodity Trader, Trainer View Program Stock Trading Stock Markets Made Easy By - elearnmarkets, Financial Education by StockEdge View Program Stock Trading Derivative Analytics Made Easy By - Vivek Bajaj, Co Founder- Stockedge and Elearnmarkets View Program Stock Trading ROC Made Easy: Master Course for ROC Stock Indicator By - Souradeep Dey, Equity and Commodity Trader, Trainer View Program Stock Trading RSI Trading Techniques: Mastering the RSI Indicator By - Dinesh Nagpal, Full Time Trader, Ichimoku & Trading Psychology Expert View Program Stock Trading Stock Valuation Made Easy By - Rounak Gouti, Investment commentary writer, Experience in equity research View Program Stock Trading Point & Figure Chart Mastery: A Comprehensive Trading Guide By - Mukta Dhamankar, Full Time Trader, 15 Years Experience, Instructor View Program Stock Trading Market 101: An Insight into Trendlines and Momentum By - Rohit Srivastava, Founder- Indiacharts.com View Program Stock Trading Futures Trading Made Easy: Future & Options Trading Course By - Anirudh Saraf, Founder- Saraf A & Associates, Chartered Accountant View Program Stock Trading Algo Trading Made Easy By - Vivek Gadodia, Partner at Dravyaniti Consulting and RBT Algo Systems View Program Also read | HDFC Bank has more re-rating potential than ICICI Bank: Santanu Chakrabarti, BNP Paribas Investors who were betting on PSUs and capex plays related to rail and defence are now hunting for new emerging themes. Where do you think the puck is going to be? We sense a shift in preference towards (i) stocks/sectors with strong earnings visibility, (ii) defensive names and (iii) relative underperformers of the past year.
Corporate earnings, after four consecutive years of healthy double-digit growth, are moderating. We see higher preference for consumer discretionary while at the margin some staples also look good specially as a hedge against any market correction. With the US rates easing, discretionary demand is expected to pick there, thus providing Indian IT some tailwinds.
Healthcare has consistently delivered healthy earnings growth over the last 4–5 quarters and stays a strong defensive play. Large private banks after a prolonged phase of underperformance are also emerging as a good sector rotation play. The market has been largely worried over the impact of tensions in West Asia, shifting of FII money to China, and high valuations.
How strong do you think the China resurgence story is going to be? Is it just a tactical trade or a long-term play? China’s recent blitz of monetary and demand side measures, appear tactical in nature to us, as there are several yet-to-resolve structural challenges like overcapacity across several segments, trade shift away from China, an ageing population, housing crisis, demand deflation etc. While the initial euphoric response was understandable given the very cheap valuation of the Chinese market then (54%/17% discount to MSCI India/MSCI EM), a secular bull run in the Chinese market may not be possible without addressing these structural issues. In fact, the initial enthusiasm of the Chinese stock market has now petered out and post the Golden Week holiday there was disappointment from NDRC’s fiscal package which came at CNY200bn vs.
some expectations of CNY3tn – leading to a 7.4% correction in CSI30 index on the day. Smallcaps have been going through a tough time.
Is most of the pain over or do you think more froth is left in the market? We think that Small Caps can see more underperformance vs. large caps. Nifty Small Cap is still trading at 52% premium to its LTA and at 5% premium to Nifty 50 (vs.
LTA discount of -12%) while some earnings pressure has started to surface. Earnings cycle is showing signs of shifting down and we have witnessed decline in consensus earnings estimates in the past 6 months. Small caps are more vulnerable to any interim cyclical moderation in economic momentum and can see bigger cuts.
Take us through your expectations from the Q2 earnings season. Which sectors are likely to disappoint the most? Consensus estimates for Nifty is expected to see a growth of ~2% YoY in 2QFY25 (lowest in 17 quarters). Ex-OMCs which would be impacted by lower refining margins, Nifty earnings are still expected to grow at 5% YoY.
In 2QFY25, the overall earnings growth is anticipated to be primarily driven, once again, by BFSI , along with Technology , Healthcare, Utilities , and the improved contribution of Telecom YoY. Conversely, earnings growth is likely to be weighed down by O&G (led by OMCs), along with Metals and Cement . Meanwhile, Real Estate, and Retail are expected to deliver strong growth, while Capital goods, Auto and Consumers are anticipated to post moderate earnings growth.
Given the valuations that we are trading at and the global set-up, how bullish are you on gold and silver? Where do you see the two precious metals headed in the rest of FY25 and is it time to raise allocation? Gold grew at a CAGR of 27%/15%/10%/12% in 1-yr/3-yr/5-yr/10-yr nearly at similar pace to Indian equity markets with Nifty50 rising at CAGR 30%/13%/24%/11% in the same period. Historically, gold is considered as the hedge against inflation, global volatility and geopolitical tension. High inflation and geopolitical tensions led to global currencies weakening against USD as well.
Also, the sanctions and freezing of foreign assets of countries at war resulted in the Global Central banks hoarding on to the precious metal. The share of the US dollar in total central bank reserves has also seen a reduction from 72 percent in 2001 to 58 percent in 2023. The past returns due to gold price appreciation also lured consumer demand, despite high gold prices.
Silver grew at a CAGR of 11%/13%/19%/10% in 1-yr/3-yr/5-yr/10-yr period, relatively underperforming both gold and equity markets. Given the setup of high valuations of the broader markets, moderating earnings and continued global volatility, we don’t see any major erosion in investors’ interest towards gold in the near term. However, with the interest rate cut cycle about to gather pace and relative similar performance of equity markets in the past, we believe the equity can outperform gold in medium to long term, provided the aforesaid concerns moderates.
For someone who is in moderate risk profile, what would be the best asset allocation strategy you would recommend? While the geopolitical headwinds and moderating earnings remain the key concerns; ongoing festive season, better-than-expected monsoon over Jul-Sep 24, and expected consequent pick-up in rural consumption provide a near-term catalyst for economic activity. Given the current market construct, moderating earnings and broader markets trading at significant premiums vs. their own LPA and Nifty50 (NSE Midcap index at 60% premium to Nifty-50 and market cap at 146% of GDP), we remain biased towards Largecaps .
We remain positive on BFSI, Technology, Healthcare, Discretionary Consumption and Underweight on O&G, Cement and Automobiles. (You can now subscribe to our ETMarkets WhatsApp channel ).
