Investors need to be prepared to tolerate high volatility in coming months: Aamar Deo Singh of Angel One

Indian benchmark indices Sensex and Nifty are currently in a consolidation phase, with the bulls having the upper hand as of now. Aamar Deo Singh, Sr. Vice President of Research, Angel One sees this trend to continuing in the coming months as markets expect a US interest rate cut which could attract foreign investments into domestic equities. Any move otherwise will invite downward corrections which may continue till November’24 due to the US Presidential Elections, he cautioned, advising investors to be prepared to tolerate high levels of volatility in the coming months. He also recommended adopting an SIP model focusing on quality names with a 3-5 year investment horizon would ideally be best suited in the current scenario. Edited excerpts:

Do you expect the market to consolidate from now till the end of 2024? Or is there more peaks to be hit?

Both Sensex and Nifty are currently in a consolidation phase, with the bulls having the upper hand as of now. This trend is likely to continue in the coming months as markets expect a US interest rate cut which could attract foreign investments into domestic equities. Any move otherwise will invite downward corrections which may continue till November’24 due to the US Presidential Elections. So, investors need to be prepared to tolerate high levels of volatility in the coming months.

What investment strategy should long-term investors follow amid these lofty valuations?

The overall Indian stock market has demonstrated robust growth, resulting in an above-average valuation. In fact, as per a recent research report, the valuation of the Indian equity market is the highest in the world after the US and Japan. This has caused a lot of concern amongst many analysts citing Q3 fundamentals that do not support the observed growth. After the covid-19 market corrections, both Sensex and Nifty have surged sharply and are trading at their highest levels.It continues to be a liquidity driven rally and that isn’t going to change in the immediate future. Therefore, investors who are planning to go long should study the core businesses of the companies astutely instead of making investment decisions on temporary developments. Also, adopting an SIP model focusing on quality names with a 3-5 year investment horizon would ideally be best suited in the current scenario.

Why have the mid and small cap stocks been rallying despite not enough fundamental strength? Should one buy them or stay cautious?

Small-cap and Mid-cap stocks have become the talk of the town due to their exemplary results which includes solid economic fundamentals, increased retail investor participation, and robust corporate earnings growth. This has led to huge influx of funds into Small-cap/Mid-cap equities and mutual funds over the last five years making the valuations expensive and also stretched in many cases. We can expect moderate performance in both Small-cap and Mid-cap sectors in the remaining months of 2024. Hence it is advised that investors should be selective in their investment approach.

What kind of returns are you expecting from Nifty in 2024?

Nifty has generated returns of almost 14 percent YTD on the back of strong performance across sectors, with IT, Banking, Reliance, amongst others leading from the front. Overall, Nifty as an Index, has generated a CAGR of almost 14-15 percent over the past couple of decades, clearly indicating the interest of investors amongst the equity markets. Going forward, Nifty and the Indian markets are expected to perform well, but one always needs to remember that markets do not always go up in a straight line, at times, they are punctuated by sharp corrections. And over the long-term, both bull markets and bear markets are part and parcel of the growth story. But those having the patience to see through the ups and downs, eventually emerge as the winners, provided they focus on quality names.

Now that Q1 is over, what should investors focus on next?

Going forward, factors that will govern the investment decisions would be the US FOMC Monetary Policy in Sep’24 and the US Presidential Elections in Nov’24. On the domestic front, the upcoming inflation data will be crucial in predicting the interest rate trend in India. Markets will also pay attention to the Central Government’s move to implement the changes prescribed in the recent Union Budget to boost the economy.

Any major risk, according to you that may lead to a massive correction in the Indian markets?

Both Sensex and Nifty are trading at an all-time high level raising concerns amongst many investors. Further, there are many stocks which have skyrocketed to an exuberant level and then there are mutual funds which have given superior returns. And this is happening despite the on-off volatile events taking place both internal and international arena. The high valuation across Indian sectors reflects the extremely bullish sentiment among investors. It is more like we knowing that there could be some hurdles ahead but instead choosing to go with the flow. The possibility of a potential correction in prices ahead cannot be ruled out but what exactly shall trigger a correction is anyone’s guess at the moment. The risks that could turn the tables could be the upcoming US Presidential elections, geo-political risks, recurring bouts in emerging markets or a sudden spike in energy prices etc. On the domestic front, it could be the inflation stickiness, lack luster monsoons or macroeconomic challenges.

When do you see the US Fed finally cutting rates? Will India follow soon?

The FOMC Monetary Policy meeting that took place in the month of July’24 bought in a lot of hopes for the investors. The committee members agreed that they would likely cut the benchmark interest rate at their next meeting in September’24 provided inflation continued to cool. Traders, investors and markets in whole started to price in this announcement which is visible in the US interest rate futures price. The August’24 SOFR futures, which measure expectations of Federal Reserve monetary policy moves, have priced in a 100 percent chance of at least a 50-basis points rate reduction in September’24 policy meet. In fact, even the recently released FOMC Monetary Policy Meeting Minutes had the same dovish tone.

Having said that, there is another set of worries that is slowly sweeping in the minds of investors. With the US Presidential Elections just two months away, is the US Federal Reserve fine with brining in the political heat with a rate cut in September’24? Former President Donald Trump has argued that the Fed shouldn’t cut rates so close to an election. But the US Federal Reserve Chaiman has repeatedly voiced out that the central bank’s decision on interest rates would be based purely on economic data and not the political calendar. Now it is just time that will unveil the true intentions of the US Federal Reserve. As far as India is concerned, RBI has been playing it smartly by keeping the interest rates and stance unchanged considering the domestic inflation and global scenario. There is a possibility that the RBI could change the policy stance by end of 2024 and make changes in the policy rates only next year.

Do you believe that Dalal Street investors have been enthralled by the IPO market so far in 2024? Is now a good time to buy shares in the upcoming IPOs, given the lofty market valuations?

Earlier, a lot many investors used to shy away from making investments in IPO’s. However, the entire game has changed over the last two years. Huge number of Indian companies – both big and small – have come out with initial public offerings tapping the market such that even the new market entrants and the matured traders confidently place their bets in IPO’s. The reason for such euphoric participation in IPO’s is mainly due to the substantial wealth that the companies have created for investors, thereby winning their trust. Speaking about 2024, more than 120 companies have hit Dalal Street as of July’24 and many are in line waiting to make their debuts. With investors now having more clarity on India’s political scenario along with the proposed developments that was announced in the Interim Budget, we can expect huge participation in the upcoming IPOs. The combination of favourable market conditions, high liquidity and a conducive growth environment with stable interest rates is going to work in favour of new listing companies.

While domestic investors are holding the fort, when do you see FPIs returning to India?

Presently, the domestic investors have emerged as the sole market movers of Indian equities. As per the recent market data, it has been observed that the huge influx of funds in India has been made mostly by the domestic institutional investors (DIIs) which has pushed both Sensex and Nifty to another new level. It was observed that the investments were made mostly in the Small & Mid-cap companies due to fundamentals of the companies and high liquidity. Not only this, the number of new demat account openings and mutual fund contributions have increased significantly this year.

On the other hand, there has been a declining trend seen in foreign inflows in India. There is a high possibility that this on-off trend would continue for the remaining months of 2024 on worries surrounding the expensive valuations of Indian equities. Moreover, India’s economic fundamentals are still not in its best of health. The inflation numbers and stagnant GDP percentage has led to RBI standing put on interest rates. Moreover, the international economic scenario is also challenging with geo-political uncertainty at its peak and services inflation holding up progress on disinflation, which is complicating monetary policy normalization. With such tough economic situation everywhere, investors all around the globe are thinking twice before making risky bets.

One piece of advice for new investors.

Investors need to understand that markets are going to remain volatile in coming weeks and months, but incase they are approaching the markets from a longer-term perspective, sticking to quality names and investing in tranches should ideally be the way forward. That way, investors shall benefit from the power of averages and also gain from the power of compounding. Also, investors are strictly advised never to trade or invest on borrowed capital, as its one of the most riskiest things to do. And last, there is no substitute for knowledge, patience and discipline, and a proper combination of all these three elements go a long in making an investor successful.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.