Expert view: Market outlook bright; positive on manufacturing, capital goods, exports, says Dikshit Mittal of LIC MF

Dikshit Mittal, a fund manager and senior equity research analyst at LIC Mutual Fund Asset Management, believes the overall market outlook remains positive due to reasonable valuations, broad-based earnings growth, stable macroeconomic conditions, and sustained domestic inflows. In an interview with Mint, Mittal shared his views on what the market expects from the Union Budget 2024 and what sectors he is positive on.

Edited excerpts:

Did Nifty 50 meet your expectations in the year's first half? What is the outlook for the next six months?

The Nifty 50 index delivered nearly a 10 per cent return in the first half of CY24, marking a strong performance.

This growth is supported by robust corporate profitability, stable to declining interest rates, and political stability at the centre.

Although predicting market returns over the next six months is challenging, the overall market outlook appears positive due to reasonable valuations (around 20 times FY26 based on consensus estimates), broad-based earnings growth, stable macroeconomic conditions, and sustained domestic inflows.

What are the key things to watch for in the upcoming Budget? What proposals can cheer, and what can upset the market?

Key things to watch in the Budget will be fiscal deficit management, the trajectory of infrastructure spending, and any tax tweaks, especially on the personal income tax front.

If the government successfully balances managing the fiscal deficit while prioritising capital expenditure and concurrently implements measures to stimulate private consumption, the market will likely respond favourably.

Any unexpected increase in capital gains taxation could provoke a negative reaction regarding the equity market.

Is some steam still left in the mid and smallcap segments? What should be our strategy for these segments?

The markets are heavily influenced by earnings, and as long as companies in these sectors continue to show growth in their earnings, they are likely to be rewarded by the markets.

Notably, many high-growth sectors, such as retail, hospitality, industrials, logistics, building materials, and quick-service restaurants (QSR), are predominantly found in the mid-cap and small-cap segments.

Investors seeking exposure to these sectors must consider investing in mid and small-cap stocks.

When investing in equities, particularly in midcap and small-cap stocks, it's advisable to maintain a longer-term perspective, ideally five years or more.

Small caps are inherently more volatile, but historically, they have performed well in the long run.

Investors should aim to maintain a diversified portfolio that includes large caps, midcaps, and small caps tailored to their risk tolerance and financial objectives.

How long do you expect the gloom to persist for the IT sector? Do you see value emerging in the sector?

The slowdown in growth for the Indian IT sector in FY24E was primarily attributed to reductions in discretionary spending and a decline in demand.

However, we foresee a modest rebound in overall IT expenditure in the second half of CY24E.

This recovery will be fueled by improving economic conditions, a gradual uptick in discretionary spending, and renewed efforts towards cost optimisation initiatives.

The substantial benefits from these developments are expected to materialise more prominently in CY25E.

Furthermore, the industry is poised for growth in the medium term due to factors such as significant large-scale deals, increased adoption of cloud computing, advancements in General Artificial Intelligence (GenAI), automation trends, and expanding offshoring activities.

What sectors should we look at for the next one to two years? Why are you positive about them?

We have a positive outlook on manufacturing, capital goods, exports (particularly chemicals and engineering goods), and discretionary consumer spending.

India is currently experiencing a multi-year capital expenditure cycle driven by investments in sectors like power, real estate, renewable energy, data centres, production-linked incentive (PLI) schemes, and export-oriented opportunities.

Companies facilitating these investments are expected to reap significant benefits over the next two to three years.

The government's emphasis on manufacturing, aimed at reducing imports and boosting exports, is anticipated to bolster multiple sectors.

India is increasingly becoming integral to the global supply chain, particularly in segments such as chemicals and engineering goods, which should translate into improved earnings prospects.

Consumer spending, especially on premium and discretionary items, is likely to gain momentum due to a youthful demographic, rising incomes, and urbanisation, all contributing to increased expenditure on luxury goods.

What will be the next big triggers for the markets after the Budget?

After the Budget, one should closely monitor the trajectory of US interest rates.

The flow of funds into emerging markets will hinge significantly on when and by how much the US cuts its interest rates, potentially benefiting countries like India.

Additionally, the outcome of the US presidential elections will be another critical factor to watch.

Domestically, the progress of the monsoon and the trajectory of corporate earnings will influence the market's direction.

What do you think about the interest rate reduction? Should we expect the start of a rate-cut cycle this year or not? Will it be shallow or substantial?

Internationally, interest rates appear to have peaked, though the specific timing of rate cuts remains a key observation point.

Domestically, bond yields have eased to 7 per cent, and CPI inflation has gradually declined over recent months.

However, the Reserve Bank of India (RBI) seems intent on ensuring CPI inflation stabilises sustainably around 4 per cent before considering significant rate reductions.

Monitoring the monsoon's progression and economic growth trajectory will provide insights into the potential extent of future rate cuts.

Should we still be concerned about inflation?

Inflation concerns remain pertinent for several reasons.

Despite a global easing of inflation, ongoing geopolitical tensions and disruptions in supply chains could lead to volatility in inflation levels.

In India, while there has been a gradual decline in inflation, it is crucial to monitor the trajectory of global commodities, particularly oil prices, as well as the progress of the monsoon and any potential weather-related shocks that could impact inflation dynamics.

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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.