Expert view: Dharmesh Kakkad, Senior Fund Manager at ICICI Prudential AMC, says the impact of El Niño on monsoon remains an important variable to watch, as any meaningful disruption to rainfall could have implications for rural demand and certain parts of the economy. Among the global factors, policy moves of the US Federal Reserve will influence capital flows, currency movements, and the overall market sentiment. Edited excerpts:
Macro risks are receding, but are we out of the woods now? Are there any risks that we could be overlooking?
Some macroeconomic indicators have turned more supportive. However, there are still several domestic and global factors that warrant close monitoring. Continuous FII selling remains a key concern.
Although domestic flows have remained resilient and continue to provide support to the market, the steady pipeline of new paper issuance is absorbing a meaningful part of this liquidity.
This could limit the positive impact of the domestic inflows in the near term. From an India-specific perspective, the impact of El Niño on the monsoon remains an important variable to watch.
While the situation is evolving, any meaningful disruption to rainfall could have implications for rural demand and certain parts of the economy.
Globally, the upcoming policy decisions by the US Federal Reserve will continue to influence capital flows, currency movements and overall market sentiment.
Nifty ended the first half of the year with a hefty loss of 9%. Can it end the year in the red?
Markets are being influenced by a combination of global macroeconomic developments, geopolitical uncertainties, monetary policy expectations and foreign investor flows.
Given these factors, we believe the market could remain volatile in the near term.
While India’s underlying economic fundamentals remain healthy, short-term market direction will largely depend on how these uncertainties evolve.
So, the optimal approach for investors to navigate through these uncertainties would be to focus on asset allocation.
How should we play the consumption theme at this juncture when there is a risk of a poor monsoon and demand remains weak?
Consumption continues to be an important long-term investment theme despite near-term uncertainties.
Discretionary demand has remained relatively resilient following the GST cuts, indicating that consumer spending in several categories continues to hold up reasonably well.
A weaker-than-expected monsoon could affect rural demand to some extent. However, reservoir levels are currently comfortable, which may provide some cushion against adverse rainfall conditions and help support agricultural activity.
More importantly, from a medium- to long-term perspective, we continue to see significant headroom for the penetration of discretionary products in India.
As the economy continues to grow and household disposable incomes improve, spending on discretionary categories is expected to increase further.
This structural trend remains supportive for the consumption sector despite temporary demand fluctuations.
IT may have value now, but are they worth buying at this point? Do you expect more pain or a trend reversal in them?
The Indian IT services sector is currently passing through one of its most uncertain phases.
Along with a relatively weak global macroeconomic environment that has slowed technology spending, the emergence of artificial intelligence has created additional uncertainty regarding the future business models of IT service companies.
This uncertainty has resulted in significant valuation de-rating across the sector.
While near-term growth is likely to be moderate due to softer global demand, some improvement could emerge as the macro environment stabilises.
We are of the view that Indian IT service companies will have a role in the AI ecosystem.
However, there is still limited visibility regarding the extent of the opportunity, the pace of adoption and the timing of its impact on earnings.
Until there is greater clarity on these factors, the sector may continue to witness periods of volatility despite being reasonably valued.
What are your expectations for Q1FY27 earnings? When do you expect a material improvement in India Inc.’s earnings?
The recent US-Iran conflict has led to an increase in several input costs, which is likely to put pressure on corporate margins during Q1FY27 and could also have some spillover impact into Q2FY27.
However, we believe the policy measures undertaken by the Government and the RBI, including monetary and fiscal support as well as steps to improve dollar liquidity through FCNR deposits, should gradually support economic activity.
As these measures begin to transmit through the economy and external conditions become more favourable, we expect earnings growth across India Inc. to improve gradually.
A meaningful recovery is likely during the second half of FY27 (H2FY27).
Can mid and small-caps outperform large-caps in the medium term, considering India’s macro outlook and FPI selling in large-caps?
A significant portion of FII selling has been concentrated in large-cap stocks, resulting in a meaningful correction in valuations across several quality businesses.
Consequently, relative valuations in the large-cap segment have become more reasonable.
At the current juncture, on a relative basis, large-cap companies appear to be better placed as compared to mid and small-cap companies from a valuation perspective.
How does a Multi-Asset Active FOF differ from a Multi-Asset Fund? What makes them ideal to invest in the current market?
A multi-asset active FoF and a multi-asset fund both provide exposure to multiple asset classes, but they differ in how they build portfolios and execute asset allocation.
The ICICI Prudential Multi-Asset Active FoF invests through a combination of actively managed equity and debt schemes, along with commodity ETFs.
This means, instead of selecting individual securities, it allocates across underlying funds, using in-house asset allocation models to dynamically decide the mix between equity, debt and commodities.
The investment style will be a blend of growth and value. On the equity side, it combines sectoral, thematic, market-cap and style-based strategies, while the debt allocation spans both duration and accrual-oriented funds.
In terms of asset allocation breakup, the active equity-oriented schemes will range from 30%-80%, active debt-oriented schemes will range from 10%-60%, and units of gold and/or silver ETFs will range from 10%-30%.
In contrast, the ICICI Prudential Multi-Asset Fund invests directly in securities across at least three asset classes, i.e. equity, debt and commodities, with a minimum allocation of 10% to each.
The fund follows a counter-cyclical investment approach, takes directional calls based on the economic cycle, and can also use covered call strategies as well as REITs and InvITs to enhance portfolio yield.
In terms of asset allocation, the net equity can range from 10%-80%, debt will be 10%-35%, gold/silver ETFs/ETCDs will be 10%-30% and REITS and InvITs can range from 0% to 10%.
We believe the current market environment is characterised by elevated volatility and relatively moderate return expectations due to multiple domestic and global risks.
In such an environment, an investment solution that can dynamically adjust asset allocation has the potential to provide a better investment experience for investors. As a result, both investment solutions can be considered by investors in the current market environment.
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Disclaimer: This article is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
