Reshma Banda, Head – Equity & EVP Investments, Bajaj Allianz Life expects a robust 20 percent growth in profit for the quarter that ended June 2023. This growth would be broad-based across sectors driven by strong growth in BFSI and automobiles, she said in an interview with MintGenie.
Amid the current market environment, Banda advises investors to focus on the long-term prospects for equity markets and the volatility should be considered as an opportunity to participate in the growth prospects of the asset class. Edited excerpts:
Markets as well as demat account additions are at new highs. What is the source of this confidence?
The Indian stock market has been experiencing a significant rally in recent months, with record highs being scaled by both the Sensex and Nifty. This surge has been accompanied by a notable increase in demat account additions as new investors enter the market. Several factors have contributed to this confidence, including moderation in domestic inflation, strong economic growth, stabilising interest rates, improving corporate earnings, and the continuous inflow of foreign capital.
Foreign portfolio investors (FPIs) have been net buyers of Indian equities, adding over $16 billion to the market so far in the first 3.5 months of FY24. This influx of foreign capital has bolstered the market rally with domestic inflows and SIPs remaining buoyant. However, global risks persist such as elevated levels of inflation, economic slowdown and a likely recession in some of the developed economies, and no let-up in geopolitical tensions. Considering the global uncertainties, India is well placed, with ongoing favourable domestic macroeconomic variables and is well placed among its peer group.
Is this the right time for investors to accumulate equity? What strategy would you suggest to investors?
The decision for investors to accumulate equities would depend on several factors, including individual investment goals, risk tolerance, and investment time horizon. The equity markets in the year have exhibited volatility, influenced by various global and domestic factors. Investors should focus on the long-term prospects for equity markets and the volatility should be considered as an opportunity to participate in the growth prospects of the asset class. It would be pertinent to focus on the Investment goal over a time period and avoid reactionary behaviour to short-term market volatility.
Diversification of the investment portfolio across asset classes could be an additional strategy that would help mitigate risk. It is critical to align investment goals and risk tolerance within the prevailing life cycle and goals of the individual.
With markets hitting multiple peaks, what do you have to say regarding the valuations? Do you think it has become expensive already?
The Nifty index is currently trading at valuations that are higher than the historical averages, with the Price to Earnings ratio of the index at 18.5x on FY25E basis and the Price to Book ratio at 3.1x FY25E respectively.
These figures suggest that the Indian equity markets are currently trading slightly above their long-term mean with the recent uptick in the markets. The benchmark index has touched new peaks, but certain thematic indexes and the small-cap index are yet to scale the previous high. Some smaller and emerging sectors and stocks are providing investment opportunities for the long term.
What are your expectations from the June quarter earnings?
We are expecting a robust 20 percent growth in profit for the quarter. This growth would be broad-based across sectors driven by strong growth in BFSI and automobiles. Earnings of metal companies would remain under pressure and would observe a steep fall.
Is the worst over with respect to inflation and other macro headwinds?
Since CPI reached a peak of 7.80% YoY in April 2022, domestic inflation has been on a declining path in recent months and is now within the Reserve Bank of India’s target band of 4% to 6%. For FY24, inflation is projected at 5.1% as per the RBI estimates. Globally also we are witnessing signs of moderation across countries, though Inflation is still higher than their long-period averages. In India, there are factors that could put pressure on inflation due to the rise in food and fuel prices. We believe the MPC will monitor the evolving inflation conditions over the coming few months and re-assess the pause in policy rates undertaken in the last couple of monetary policy meetings.
The adverse impact of El Nino on monsoon expectations has been less significant compared to previous years and rainfall has been within the normal range for the country. Monitoring of the spatial dispersion of rainfall will be focussed on to obtain additional insights on agri health in the country. With global commodity prices remaining under check, corporates are benefitting from the decline in input material prices. Geopolitical stability would be an important risk factor to ensure that inflation remains within the estimates of the central bank.
Which sectors, according to you, show the best long-term growth opportunities and why?
With improvement in GDP growth and moderation in inflation, we are optimistic about the prospects of domestic consumption. Sectors like FMCG, Automobiles & BFSI would benefit from this trend and we would expect them to outperform in 2023. We have been positive on the Capital Goods sector due to a pickup in investment & manufacturing activities.
Among the defensive sectors, valuations of both IT and pharmaceuticals are attractive. IT sector earnings growth appears slightly uncertain with global growth slowing down but valuations are now looking reasonable. Pricing weakness in the US generic market seems to have stabilised, providing visibility for pharmaceutical companies to be priced in.
As things around us change rapidly like consumption patterns and rebound in discretionary spending should benefit companies in QSR (Quick Service Restaurant) segments.
Midcaps and Smallcaps - Yes or No in the current environment?
Investing in Mid-Caps and Small Caps in the current Indian market environment can hold potential benefits, but it is essential to carefully evaluate associated risks. While these stocks offer higher return potential compared to Large Caps, their relatively low liquidity and the presence of macro headwinds introduce volatility and challenges. However, the Indian economy's growth trajectory and the presence of promising companies provide reasons for having exposure to midcaps in an individual’s portfolio.
What risks markets can encounter in the short term?
We are concerned about the progress of the monsoon, considering the El-Nino impact. Any delay here could increase the inflation risks and impact the nascent stage of recovery in rural India.
The crisis in Ukraine has been prevalent for more than 15 months and any escalation in the situation could result in deterioration of the global macro-economic environment.
One piece of advice for new investors
Investing in the financial market can be a rewarding opportunity, but it requires a disciplined approach. Use your savings wisely and invest your funds across a basket of asset classes on a regular basis. It's important to set clear financial goals aligned with your objectives, whether it's saving for retirement, education, etc.
Staying invested and regularly investing over the long term despite the volatility in the markets would be critical towards the achievement of goal and participating in the India growth story.