Indian stock market valuation high, more time-wise, absolute corrections due, says Naveen Kulkarni of Axis Securities

Indian stock market valuation is still high despite some recent correction, and it may see a more time-wise and absolute correction, says Naveen Kulkarni, Chief Investment Officer at Axis Securities PMS. In an interview with Mint, Kulkarni shared his views on the short-term outlook for the domestic market, the impact of the upcoming US Presidential election and geopolitical tensions. He also shared his views on the rate cut expectations from the US Fed and the RBI and the sectors he is positive about.

Edited excerpts:

What is your assessment of the current market structure? What is the outlook for the rest of the year?

The current market structure remains positive, but some challenges have emerged recently.

The Q1FY25 results were slightly sluggish compared to expectations, as growth was lower and margin challenges started to emerge.

However, the sluggishness is also due to seasonality; some recovery is expected during the year.

Overall, earnings estimates have not seen an upgrade after three consecutive quarters of upgrades.

While the challenges are temporary, some degree of caution is warranted.

The market will remain positive for the rest of the year, but it is unlikely to see returns close to the year's first half.

How do you see the current market valuation? Is more correction due?

The current market valuation is high, especially in mid- and small-cap sectors.

It is likely that we will see both time and absolute corrections in these areas.

The large-cap sector is more reasonably priced, trading more than 1.3 standard deviations above the long-term average.

Therefore, even the large-cap sector could experience some time correction.

In summary, we may see a combination of time and absolute corrections depending on the sector, categories, and other market factors.

How could the US Presidential election impact the Indian stock market?

It is challenging to gauge the market based on political events. Also, the impact of political events is long-term, like a change in policy direction.

At this juncture, it is better to expect that US presidential elections are unlikely to have any significant impact before the event.

The impact will most likely be seen after the event.

History suggests that the immediate effect has been short-term in most cases, as policy implications are long-term in nature, and the short—to medium-term earnings trajectory for companies does not change significantly.

How significantly could the flare-up of tensions in the Middle East and political turmoil in neighbouring Bangladesh impact the Indian market?

The impact of such events is difficult to gauge. However, a key indicator is crude oil and inflation. If crude oil prices increase significantly, it will hurt the Indian markets. 

Therefore, it is essential to closely monitor crude oil and commodity prices to assess the impact of these political events.

Considering the concerns over an economic slowdown in the US, when do you expect the Fed to cut rates?

It is highly likely that the Federal Reserve could cut rates at the September meeting on the 17th and 18th of the month. This may pave the way for two rate cuts. 

However, inflation persists, and substantial rate cuts could pose a challenge by further increasing inflation.

What could be the extent of rate cuts by the US Fed this year? Will it be a 100 bps cut or less than that?

As indicated earlier, a rate cut will likely be less than 100bps this year. At the beginning of the year, the market was expecting five to six rate cuts, but by mid-year, that number had dropped to almost zero, with some economists even discussing rate hikes.

However, the recent weakening of US data and global challenges have increased the chances of larger rate cuts again.

Though the situation is still uncertain, we believe the US Fed will be cautious in cutting rates too quickly. Therefore, we think it's more likely that there will be two rate cuts of 50-75bps rather than a full 100bps cut this year.

Should we expect a cut from the RBI in October?

Following the Fed rate cut, the RBI may reduce rates based on the monsoon sowing and CPI trajectory.

The latest inflation data has fallen below the RBI's target rate, increasing the likelihood of rate cuts in October.

However, the impact of the monsoon and CPI trajectory is unclear.

India's CPI changes much faster than in most developed countries, so the RBI takes time to cut rates due to the high chances of the economy overheating over the medium to long term.

Considering various factors, we estimate that the chances of a rate cut are over 50 per cent, but certain global or domestic factors could hinder this in the near term.

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

Capital goods, utilities, autos, pharmaceuticals, chemicals, and private banks are the sectors that continue to remain strong.

The chemicals sector could see an interesting turnaround. It has faced serious headwinds due to the global destocking cycle in agro commodities, but it seems like this cycle could be ending, and we could see an upswing in the forthcoming months.

What should be our investment strategy at this juncture?

Our main focus is to reduce portfolio risk, and low-volatility investing is a good strategy to adopt in this market environment.

Low-volatility investingminimisesthe potential downside and allows market forces to reprice assets based on their lower-risk profile.

This strategy could work well in the current market. In addition to low-volatility investing, value investing is critical, particularly because the market is expensive and finding value is challenging.

Therefore, any asset offering good value is likely to yield good returns.

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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.