Expert Take: Fund flows expected to shift towards large-cap stocks as investors seek stability, says Ajit Mishra

Indian stock market: Ajit Mishra - SVP, Research, Religare Broking Ltd, believes that investors should use intermediate corrective phases to accumulate quality stocks. In an interview with Mint, Mishra highlighted key market triggers for the second half of 2024, trading strategy and Indian market position in the world.

Edited excerpts -

The Indian market added more than $1 trillion to its market capitalisation over the last six months; What can we expect in the next six months amid coalition government?

After a robust first half, the positive trend is likely to persist, supported by an improved macroeconomic environment and consistent domestic investment flows. Favorable global cues, especially from the strengthening US market, further bolster this outlook. However, political instability poses a significant risk, potentially disrupting market momentum. Additionally, for the high valuations to be justified, continuous earnings growth is crucial. Any shortfall in corporate performance could lead to market corrections. Thus, while the current conditions are promising, investors should remain vigilant to potential political and economic shifts.

What should be the market trading strategy for both small-term and long-term investors for the next six months?

In the near future, the Nifty index may experience some consolidation, with key support levels at 24,150 and potentially 23,700, and resistance in the 24,800-25,000 range if a rebound occurs. Given the mixed signals and heightened volatility, a defensive approach focusing on FMCG, pharma, and IT sectors, particularly major index stocks, is advisable. It’s also prudent to have exit strategies for overbought themes like defense, railways, and other PSUs in case of further declines.

Despite the current conditions, the medium to long-term outlook remains positive. Investors should use intermediate corrective phases to accumulate quality stocks. While midcap and smallcap stocks outperformed large caps in the first half due to strong domestic demand, favorable government policies, and robust earnings growth, their valuations are now stretched, making them less attractive. Conversely, large-cap stocks offer more reasonable valuations, drawing investor interest. Consequently, fund flows are expected to shift towards large-cap stocks as investors seek stability and better valuation opportunities in an increasingly volatile market. Investors should adjust their portfolios accordingly for more balanced and sustainable returns moving forward.

What factors are likely to influence the Indian market this year?

Market participants will now focus on several critical factors in the coming months. Domestically, the progress of the monsoon season will be closely monitored, as it significantly impacts the agricultural sector and overall economic health. Additionally, the Reserve Bank of India's (RBI) stance on interest rates will also be pivotal.

On the global stage, the interest rate environment in the United States will be a key area of attention. The US Federal Reserve's decisions on interest rates can have widespread implications for global liquidity and investment trends. Moreover, the upcoming general election in the US will add another layer of uncertainty and potential volatility to global markets. And, the updates on prevailing geopolitical scenario will also remain on the participants’ radar.

Aside from these macroeconomic and political triggers, corporate earnings will remain a fundamental driver of market sentiment.

What does the Indian market look like as compared to other countries?

Within emerging markets, Asia led the way, with Turkey outperforming all others. India ranked fourth in market returns in the first half, behind Taiwan and South Africa but ahead of Hungary and China. Global sentiment towards India is improving, driven by consistent economic reforms and strong market fundamentals. This positive outlook is expected to strengthen if the Indian government continues its reform agenda and maintains fiscal prudence despite the coalition at the center.

Sustained policy stability and effective economic management will be crucial in solidifying India's position as a preferred investment destination.

Which sectors should investors focus on in the coming months amid Modi 3.0 government?

Investors can find compelling opportunities for new investments in the technology sector, especially in companies focused on artificial intelligence and cloud computing, given their strong growth prospects and the increasing reliance on digital solutions across industries. The FMCG sector is also poised for growth, benefiting from rising consumer spending and an overall economic recovery, which is driving demand for everyday products. Additionally, select areas within the infrastructure sector, such as construction and materials, are expected to see sustained growth due to ongoing government initiatives and investments in development projects. The banking sector, including Non-Banking Financial Companies (NBFCs), presents robust long-term investment prospects as financial inclusion efforts and digital banking trends continue to expand. These sectors collectively offer a diverse range of opportunities for investors seeking stable and potentially high returns.

Disclaimer: The views and recommendations above are those of the expert, not Mint. We advise investors to consult certified experts before making any investment decisions.