Expert view: Indian stock market may go much higher after a correction, says Dhiraj Relli of HDFC Securities

Expert view on the Indian stock market: Dhiraj Relli, MD & CEO at HDFC Securities, believes the Indian stock market may not be very far from the top. However, given the inherent advantages of the domestic market, it may aim for much higher targets after a correction. In an interview with Mint, Relli says investors need to rebalance their allocation amongst the large-cap, mid-cap and small-cap stocks and correct the excesses.

Edited excerpts:

What is your assessment of the current market structure? What is your short—and medium-term outlook for Nifty 50?

Markets have kept climbing the wall of worries, helped by flows—mainly local. Technical factors like impending F&O curbs have not had much impact on indices' trends so far.

The adverse negative impact of the Election outcome or Budgetary provisions was also quickly overcome. Q1 Corporate results have not surprised positively in any major way.

We think macro stability and hopes of continued strong growth aided by a normal monsoon this year may be key factors in the current bullishness in the markets.

Also, local investors (including those who came in post-COVID) have made good money (or MTM gains) in the markets, which incentivises them to bring in more money or take advantage of any dips.

The equitisation of savings has reduced dependence on foreign inflows and brought stability to our markets.

The fact that Nifty has not seen any meaningful correction since the bottom of June 2022/March 2023 raises the risk of correction setting in over the next few months.

The global markets also seem to be behaving similarly. The flow of money due to QE from the G4 Central Banks since 2008-2009 and later during Covid times (from $4.4 trillion in Sept 2008 to $15.17 trillion in Feb 2020 to $26.38 trillion in Feb 2022) has resulted in inflation in the value of asset classes.

The withdrawal of liquidity (to $19.98 trillion in July 2024) has been slower, and hence, the positive impact of the infusion of liquidity is still strong.

The expectation of the beginning of a rate cut in September by the US Fed could further raise values as equity valuation can rise in a falling interest rate scenario (though past correlations don’t seem to be working nowadays).

However, one needs to be cognizant of the possibility of buying based on expectation and selling on news themes that play out in the markets repeatedly.

The upside in the Nifty seems limited and laboured; however, one needs to make individual calls about whether they would like to keep riding until the markets start reversing or start booking profits in anticipation and lose on the remaining upside.

Mid and small-cap segments have been rising despite valuation concerns. What should our strategy be for these pockets?

Mid and small-cap stocks have traditionally provided alpha to investors' portfolios, hence the continued attraction towards them.

Unless in the US, where some mega-cap stocks have driven the indices and small-cap stocks have trailed in most periods, in India, small and mid-cap stocks have returned higher than the Nifty (although they also fall more than the Nifty).

The proliferation of PMS, AIF, and smallcases over the past few years means that small and midcaps are being chased to show outperformance.

This trend could prove counterproductive when economic growth falters, or some hit the markets.

Until then, investors basking under recent gains have become bolder to pay high valuation premiums to such stocks, hoping for a turnaround or valuation catch-up with peers.

Promoters of such companies have tasted blood due to the market-cap rise and have changed their attitude towards minority shareholders, which is a welcome development.

Investors need to rebalance their allocation among large-cap, mid-cap, and small-cap stocks and correct the excesses compared to the original plan.

They also need to be wary of promoters who have had bad names in the past and now are acting reformed.

Within small and midcap stocks, they need to take some profits from stocks that have run up sharply in the past few months without commensurate triggers.

Where should we put our money in this market? What sectors look attractive for the next 1-2 years?

Though in a rising market, all sectors have risen (though in different proportions), there may still be some value in some sectors, like the traditional cyclical—oil and gas, metals, or defensives like healthcare and some consumer stocks.

However, given that the fortunes of all sectors tend to change sharply every few months or their valuations catch up fast, one needs to periodically check whether they still offer the same value or margin of safety.

Do you think the market lacks fresh triggers? What will drive the market from here on?

The next set of triggers for the markets include the outcome of the monsoon season (its spread and intensity), the outcome of state elections, the trend of food inflation, global geopolitical developments, and the trajectory of global interest rates.

The results for Q2, due in October/November, will also show how the pre-festive season has fared and whether the much-awaited rural revival has happened.

We have seen a bull run in the Indian market since 2020. Are we near its end? How long will this bull run continue?

It is a difficult call, but for this move, we may not be very far from the top. However, after a period of correction/consolidation, we may aim for much higher targets given the inherent advantages of Indian markets.

When do you expect the US Fed to start rate reduction? How will it impact the market?

Federal Reserve Chair Jerome Powell said on July 31 that interest rates could be cut as soon as September if the US economy follows its expected path.

According to the CME marketwatch tool, the probability of a 25 bps rate cut in the Sept 17-18 meeting is 86.5 per cent, while that for a 50 bps cut is 13.5 per cent.

We think that further rate cuts may have to wait until US inflation falls sustainably and the new US president provides greater clarity about fiscal policies.

Do you see any risks looming? What could derail this market rally?

Our markets face potential risks from internal and external fronts. Internally, if the monsoon does not turn out to be as good as expected, then the much-awaited rural resurgence may have to wait even longer.

If the ruling coalition faces setbacks in the state elections scheduled for October, the reform thrust could be uncertain, and the political climate may be vitiated.

Inflation (especially food) needs to come under control to allow for easier monetary policy to boost the economy.

Externally, if the geopolitical situation worsens so that India gets hurt (through slower exports, higher logistics costs, higher crude prices, and/or higher defence costs) or if there is a meltdown in the small and midcap space, it could slow down the momentum of the markets.

Also, if the risk appetite of global investors shrinks, then we could see slower inflows and even high outflows.

Read all market-related news here

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.