In an interview with ETMarkets, Doshi said, “There could be a special focus on increasing income opportunities at the bottom of the pyramid, rationalizing taxes, driving the capital expenditure cycle and balancing the dual deficit (public and private).” Edited excerpts:
June was a volatile month for Indian markets, but bulls maintained their momentum and pushed the benchmark indices to new highs. What’s fueling the optimism?
The market’s optimistic outlook is built on five key expectations: economic growth, corporate earnings trajectory, investor sentiment, monetary policy outlook, and market momentum.
These factors often interact and reinforce each other, creating a positive feedback loop that can drive market optimism. We are in a period where most of these factors have been consistently positive. The market was sensitive to fears of discontinuity in the single-party majority system that we have witnessed over the past decade, but quickly corrected itself after assessing the composition of the new coalition and the cabinet structure that clearly shows the dominant threads of continuity in the key ministerial councils and portfolios. This provided the market with a sense of relief that there was no possibility of deviation from the expected policy path for the economy and capital markets.
High retail interest and ample cash flow from domestic institutions also contributed to this optimism.
We also completed the first six months of 2024. What does H22024 look like? What are the key trigger points that investors should watch out for?
We all live in an unstable and uncertain world. The changing dynamics of economics, politics (elections) and conflict (there is a new one every quarter), mixed growth, stubborn supply-driven inflation and responses to central bank interest rate policies. Add to this the noise about AI and the impact on business model canvases, technology life cycles and impending job losses. The two most important global events are the outcome of the US election and the much-anticipated Fed rate cut (both in scope and frequency).
The event to watch domestically is the Federal Budget 2024-25, which is the first budget of the new regime and will set the tone for the monsoon and RBI policy expectations, progression and diversification ahead of the global rate cut cycle, if any.
One should also be wary of the paradox of the market delivering high single-digit returns in a quarter when the BSE500 quarterly PAT growth (annualized) on March 24 was 11%, its lowest since December 22 (5%).
Moreover, the percentage of companies with PAT growth rates below 0 has increased over the past two quarters, now standing at 33%, but still below the five-year average of 37%.
The market is hitting new records every day and retail investors are buying the dips. The same dips we saw after the elections. How are retail investors picking stocks? What trends are you seeing in your fund house?
Today’s retail investor is better informed, more educated, and more armed with a savvy framework for navigating the markets using massive amounts of data and information.
Improved financial literacy also plays a role. And don’t forget the inherent youthfulness, aggressive approach, and ambitious mindset. Easily accessible self-help resources, subscription-based media, and low-cost brokerage platforms are also supporting these investors’ decisions.
We do not operate in the retail investment space. We are designed as a long-term, low churn, focused equity investor to meet the wealth needs of UHNIs.
Our relationship with money has evolved, our expectations about the markets are rational, and we are much more informed.
How are earnings likely to develop over the next six months? Recent trends suggest that prices are rising ahead of earnings upgrades.
We are in the early stages of annual results. The busy season is still far away and has not yet begun. Earnings expectations generally remain unchanged during this period.
Beyond the current earnings season, we expect to see more significant earnings revisions based on demand outlook, management commentary, updates on key products, and additional developments from governments initiating a new capital spending cycle and visible policy efforts to boost economic activity at the bottom of the pyramid.
Earnings upgrades are only part of the equation when it comes to market performance. Liquidity and sentiment are two other things. Barring any unexpected global external events, both appear to be unthreatened by the promise of continued retail flows through DIIs, relatively light weighting and under-ownership by FIIs, and the recency bias in asset class performance that influences expectations in the short/medium term.
What are your expectations for the final 2024 budget?
Over the years, with the formation of the GST Council and its constant monitoring of economic development, the importance of the annual budget has diminished.
Against this backdrop, the 2024-25 federal budget is significant as the first budget of the new regime. The focus will be on addressing unfinished business and fast-tracking some of the pending reforms.
We can expect a particular focus on increasing income opportunities at the bottom of the pyramid, rationalizing taxes, and stimulating the capital expenditure cycle (public and private) while balancing the dual deficit.
Special attention can be expected to be given to areas that support self-reliance through import substitution and can satisfy large domestic markets.
How do FIIs view the Indian market?
FIIs have been a vital cog in the Indian story for the past three decades. However, their influence on market direction has generally diminished due to the onset of a large domestic savings pool seeking superior long-term returns with promised monthly inflows into DIIs (including MFs and insurance).
For FIIs, India is one of the markets and domestic investors are staying here with strong stickiness. Equities continue to be the preferred asset class for savers. Riding the megatrend of continued financialization supported by increasing penetration, continued market buoyancy, increased retail interest, expanding base of new and early stage investors and increasing financial literacy.
The steady domestic capital flow since the aftermath of COVID-19 has continued to act as a buffer against the volatile foreign capital flow, resulting in a lower decline and lower volatility during the adjustment period.
These factors have explained the persistently high multiples for Indian equities. FII flows are a slave to relative opportunities in the market in terms of valuation multiples, growth yield profile and liquidity support opportunities.
India is an emerging market with a market structure that is almost developed in terms of equality, law enforcement, digital readiness, and the DNA of an educated population. India has historically been grouped with China for comparison and has been given secondary treatment in most cases.
The performance of the last four years has turned the tables. India is now one of the must-own markets and has gained importance in the new investment world with incremental flows excluding China due to its continuous performance improvement.
We should expect them to be persistent buyers in India over the next few years. The extent of their commitment and flow will continue to depend on their earnings growth trajectory and the relative performance/valuation gap with their EM peers.
FII ownership in Indian equities has been on a downward trajectory for the past four quarters and is at its lowest level since September 2022. It peaked at 20.7% in December 2020 and is currently at 17.8%.
FII flows in SMID are much higher than DMFs as a % of free float. Conversely, DII ownership has been on a steady upward trajectory for several years and at 14.5% in March 2024, it is the second highest since March 2005.
In this regard, retail participation has also increased significantly over the past decade, with retail ownership increasing from 9.48% in June 2014 to approximately 11% in March 2024.
What about small and mid-cap stocks? Given the uptrend we’ve seen in this space, are there still stocks available at attractive valuations? Or is it time to change your valuation methodology?
The attractiveness of an investable space should be viewed in terms of relative opportunity. While the PE is a good starting point, deeper insights can be gained from the EYBY gap and earnings growth differentials relative to the market within this space.
The pendulum is certainly swinging to extremes in the SMID space. The excess return growth differential between mid-caps and large-caps has narrowed over the past two quarters and is now at -34% (mid-cap minus large-cap).
Small caps are at -7%. The mid cap EYBY gap is at -4.6, which is near its worst ever, compared to the 7-year average of -3.6. Similarly, small caps are at -4.1, compared to the 7-year average of -2.6.
All the queries we ran to find potential opportunities found that the SMID space trades at a ~30%+ premium to similar large cap stocks. We believe there are more outperformance opportunities in the large cap space than SMID in the near future.
What topics will be in the spotlight in the next six months?
For an inflection point economy with a GDP per capita of $8,600 (PPP), India has several tailwinds. The Indian economic environment is poised for a long-term growth trajectory, supported by demographic tailwinds, digital innovation, democratic stability, and holistic development initiatives.
This combination is accelerating megatrends encompassing premiumization, fintech proliferation, market consolidation, healthcare upgrading, formalization, urbanization, import substitution, manufacturing revival and generational increases in capital spending.
For discerning investors, this paradigm shift presents attractive alpha generation opportunities in sectors such as aspirational consumption, discretionary consumption, home improvement, BFSI, capital goods and healthcare.
These vertical investment areas, poised to capitalize on structural economic changes, offer the potential to consistently outperform long-term investment theories.
(Disclaimer: Recommendations, suggestions, views and opinions provided by experts are their own and do not necessarily represent the views of The Economic Times)
