Expert view: Corporate earnings growth, geopolitical stability key triggers for FY25, says Niraj Kumar

Expert view: Niraj Kumar, Chief Investment Officer at Future Generali India Life Insurance Company expects FY25 to be driven by sustained corporate earnings growth, policy continuity and a favourable geopolitical landscape and any disappointment on these fronts may have negative ramifications on the market. He said equity markets are pricing in a perfect US soft landing and hence any disappointment in growth or sticky inflation will hurt the markets. In an interview with Mint, Kumar also shared his views on the sectors he is positive about and his outlook on inflation and growth. Edited excerpts:

What are going to be the major triggers for the market for the next six months? 

If we have to see from the horizon of the next six months, then clearly the key triggers for the market would revolve around the impending election results and political landscape, global central bank policy actions and visibility on timing of interest rate cuts, monsoon progress and of course earnings performance. 

We reckon central banks' timing and the magnitude of interest rate cuts along with policy continuity will be of paramount importance and the key defining factor for the market at the current economic juncture. 

Albeit markets have already discounted the general election results with the incumbent ruling party slated to continue, we remain wary and do not rule out any potential volatility in the near term. 

Besides, if the incumbent government were not to come back to power, then it would be a big setback for equity markets. 

Furthermore, equity markets are pricing in a perfect US soft landing and hence any disappointment in growth or sticky inflation will hurt the markets.

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Politics and policy are two key triggers for the market. We have General Elections this year and interest rates could also start going down this year. Has the market discounted the return of NDA in power after the Lok Sabha elections and the Fed rate cuts from June? 

The stupendous rally seen in the domestic equity markets reflects the exuberance of having policy continuity with the incumbent party at the helm and confidence in soft landing and impending Fed rate cuts in the second half of 2024 (2H2024). 

While political stability and some easing in monetary policy have largely been priced in, given the recent correction particularly in the broader markets, in-line outcomes may support a relief rally. 

The prevailing sentiment suggests political stability and is anticipated to instil stability and boost confidence in the markets. 

That said, any adverse outcome will also have a bearing on markets. 

From an interest rate cut standpoint, clearly, markets have tempered down their expectations around the quantum of rate cuts, from initial expectations of nearly six to seven cuts in 2024 to now that of three cuts in 2024 in line with the Fed’s dot plot. 

Monitoring the Fed's approach to managing the final stages of disinflation will be crucial.

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Do you expect a change in the current narratives about inflation and growth? The worst could be behind but challenges persist. What do you think?

Prima Facie, from a domestic standpoint Inflation and growth have not been a major wall of worry to climb when compared to global counterparts. 

Albeit there have been bouts of high Inflation prints in India, the trajectory is now seemingly aligned to RBI’s target range, unless there are some unprecedented food and geopolitical shocks. 

Domestic growth has largely been resilient despite significant monetary tightening. 

Inflation has also moderated although the last mile of disinflation is proving a bit challenging.  

The broad expectation is that moderation in growth along with easing inflation should be supportive of monetary policy easing. 

The risk is that relatively sticky inflation keeps rates higher for longer, which leads to a more protracted slowdown. Nevertheless, at the current juncture, policymakers seem to be managing a fine balancing act. 

The central banks are indeed cognizant that any policy restraint too soon or too much could undo the progress achieved so far and at the same time any policy restraint too late or too little may have negative ramifications on economic activity and employment.

Also Read: Expert view: Expect moderate gains in 6-12 months; General Election key trigger for market, says Rahul Bhuskute

What sectors are you bullish about for the next one to two years? 

We believe growth and domestic play will be the key mantra for CY24. 

Indian economy is at the cusp of a virtuous growth cycle, and this is well testified by the strong GDP growth prints and the budget’s continued focus on structural growth enablers such as capex on infrastructure, sustained push towards manufacturing and green energy transition. 

With policy continuity anticipated to be maintained, we reckon the key domestic domestically focussed sectors such as infrastructure (which includes roads, highways, railways and urban infrastructure) and construction and allied sectors such as cement and auto will be prime beneficiaries. 

Besides sunrise sectors such as green energy transition and electrification are also likely to be attractive with continued focus on themes of de-carbonisation linked capex and EVs. 

The power sector is another space which continues to be in the limelight with renewed thrust on the renewable energy space by the government. 

We also like the BFSI sector as the risk-reward still seems favourable particularly in banks, although near-term NIM compression is likely to sustain and credit growth may see some moderation from the peak. 

Besides, a fiscally prudent budget and a pivot in the rate cycle would bode well for the financial sector especially NBFCs, which are likely to be key beneficiaries of lower interest rates as it would entail lower costs of borrowings.

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Why have we seen a strong outperformance from the automobile sector in the last one year? Do you expect the trend to continue?

The recent outperformance of the auto sector can be attributed to the normalization of supply constraints, benefit from premiumization and rise in the share of SUVs in their portfolios and robust margins. 

Premiumization has aided improvement in the revenue mix and provided some pricing power, even as raw material prices have moderated supporting margin expansion. 

A rising share of financing in vehicle purchases is aiding both sales and premiumization. 

A pickup in the used car market along with the rising availability of finance to purchase used cars may also be supporting a faster replacement cycle. 

From now on, while growth in the sector is likely to see some moderation on a high base, the auto sector is also likely to see continued benefits from premiumization at the top of the pyramid, a rise in the share of EVs, increasing push for exports (with many auto players reaping the benefits of PLI) and relatively benign commodity costs. 

While much of this momentum has already been realized, one can play certain segments which exhibit potential for further growth. 

Hence, making stock-specific decisions within the auto sector remains advisable.

Also Read: Expert View: India to remain top investment pick, rate cut expected in FY25: Sanjay Chawla of Baroda BNP Paribas AMC

The earnings outlook of Indian IT players has been sombre yet some of them have clocked strong gains. What explains the rise in IT stocks in the last one year despite challenges? 

IT companies have indeed witnessed a strong PE re-rating on the back of expectations of better growth delivery as the global recession has been elusive. 

Besides, the outlook on margins is expected to get better aided by the resolution of supply-side challenges, reduced attrition, and reasonable wage increments. 

However, from a domestic standpoint with the Indian economy slated to remain strong along with large FII inflows anticipated, INR can become a headwind from a margin perspective. 

The capital allocation in the sector also remains efficient with large payout to shareholders through dividends and buybacks warranting higher PE. 

Furthermore, order inflows for most companies have remained strong, which bodes well from a growth outlook standpoint. 

The better growth outlook also stems from the fact that IT spending is now perceived as core to the sustenance of any business and no longer considered discretionary, while emerging business lines like generative AI will also aid growth.  

Besides, anticipation of potential rate cuts by the US Fed in 2024 is expected to boost discretionary IT spending in the BFSI space, which is a key segment of the IT sector.

Should we expect moderate returns from equities in the next financial year?

The rally in equity markets is echoing the strong macro backdrop, sustained earnings growth, political stability, and yet favourable liquidity. 

While markets have climbed the cliff, we believe some consolidation in the interim is likely. 

Mid and small-caps have seen a strong catch-up in FY24, leaving a very small margin of safety in terms of valuations when compared to large caps. 

Regulatory scrutiny over potential overvaluations and liquidity in mid and small-caps could dampen future investment flows into funds focused on these areas, potentially making large caps more attractive at the current juncture. 

Also Read: Expert view: Nifty 50 may give a double-digit return in FY25: Naveen Kulkarni of Axis Securities PMS

We see limited triggers for a significant rally although an eventual rate cut in the global rate cycle bodes well for all asset classes including equities. 

Since FY24 has seen a broad-based rally, especially in the broader indices, we expect FY25 to be driven by sustained corporate earnings growth, policy continuity and a favourable geopolitical landscape and any disappointment on these fronts may have negative ramifications on the market. 

Overall, we expect the equity market returns to be positive (in line with moderate earnings growth) but believe the market is likely to see divergent trends across sectors and hence one needs to be cognizant of selecting the theme/sector/stock selection.

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