Vikas Gupta, CEO & Chief Investment Strategist at OmniScience Capital, believes that the Indian stock market remains on firm ground amid a strong macroeconomic setup. He expects the Indian markets to outperform the other developed markets in the year ahead.
Sectorally, he prefers the banking space and recommends avoiding IT and defence pack as valuations and sector-specific risks weigh. Edited excerpts:
Earnings season is behind us. Which segment stood out, and what is the outlook going ahead?
Being overweight on banks for several quarters now, our focus within large caps was on the banks. The PSU banks saw double-digit growth on the asset books. Asset quality continued improving with NNPAs close to historic lows. The balance sheets are the strongest in decades, with idle lending capacity as indicated by the high CRARs. Outlook for the next 3-5 years is strong. The outlook remains strong for private banks as well.
Within midcaps and smallcaps, industrials continue to perform well, showing increased manufacturing activities. The continued strength in manufacturing is also indicated by the strong manufacturing PMI.
Do you think IT can emerge as a contra bet this year, or will it remain a wealth destroyer?
We think the revenue growth in the near term for the IT companies remains challenging. Over the medium and longer term, the AI opportunity looms large. The multi-trillion dollar capex in AI infrastructure by the big cloud providers in the US indicates that there is an expectation of multi-trillion dollar AI-related revenues from the enterprise clients. If this expectation holds, it cannot be without a very large opportunity for the Indian technology service providers. These companies are likely to gain from the large AI services demand from enterprise clients putting their data on the AI-cloud and getting help from the Indian AI service providers for gaining insights and business results.
However, given the uncertainty of how all of this will shape up in terms of revenue and earnings growth and margins for the sector, makes us sceptical of investing in IT at the current valuations.
Do you think massive SIP inflows are preventing meaningful correction in the market?
SIP flows are going to remain strong in future years, too. Of course, a sustained bear market will mark slowdowns in the SIP inflows. However, the secular trend for SIP inflows is likely to remain strong and growing. This does create an inertia in terms of potential de-rating of overvalued companies. Especially, the new money goes towards supporting overvaluation in high-quality but overvalued companies, which have been favourites of fund managers for years. However, some of these companies are now seeing slight de-ratings, and this is likely to spread across the high-quality overvalued segment.
Large-cap PE ratios seem close to fair value given the lower expected inflation and interest rates, and consequently lower discount rates, for the future decades compared to the historical averages. Mid and smallcaps could see rotation from the overvalued quality companies towards undervalued companies despite the strong SIP flows, as fund managers try to maintain their performance.
Defence index has rallied 50% in a year. Do you see more upside?
At the current valuations, the Defence index looks overvalued. However, the growth expectations remain strong, and this prevents any meaningful correction. Any disappointments on growth likely make these valuations vulnerable to de-rating. We would suggest caution in selecting defence stocks. Any selection process should not focus only on the near term revenue and earnings growth, but also on what is the estimated sustained earnings growth for the long-term, and whether the company is available at a fair price or a significant discount to its intrinsic value. A selection process focused only on earnings growth without strict discipline on valuations is likely to give ugly surprises.
What are the biggest risks that the equity markets are facing currently?
Global shocks on oil prices and other commodities, if inflationary, are a key risk. If we end up importing inflation, the near term interest rates will face upward pressure and make the markets vulnerable to a correction. However, other than that, we don’t see any major domestic factors which could be a big risk for the equity markets.
Do you expect India to underperform or outperform global peers? What could be the driving factors?
We expect the revenue growth to accelerate in the near to medium term, especially driven by increased capex activity by both the government and private sector. Infrastructure spending by the government and increased production capacity by the private sector are likely to sustain the growth over the medium term. Most fundamentals of the Indian economy remain robust. Corporate balance sheets are strong with room for further borrowings and bank balance sheets remain strong for further lending. With demand likely to strengthen from both the domestic consumer as well as international markets driven by the recent slew of trade deals with different regions and countries, we are optimistic on the Indian markets.
In the medium term, we expect Indian markets to outperform the other developed markets. US markets are likely to have a similar performance to Indian markets. An equity portfolio with significant allocations to the US and the Rest of the World (Developed), besides India, would provide exposure to more rewarding opportunities while maintaining a less volatile portfolio. Given the AI disruption, any portfolio selection has to be quite selective in terms of optimising the growth expectations with valuation discipline. Investing in indexes globally at elevated valuations could be risky given the inability to create a selective portfolio.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
