Samvat 2081 kicks off with Muhurat trading. A year for stock pickers?

After a sterling year that took stocks to record highs, Samvat 2081 kicked off on a positive note, with stock benchmarks ending in the green. However, market veterans had words of caution for the road ahead: Do not expect a replay of Samvat 2080, preserve capital, and limit your expectations.

The Nifty 50 and Sensex closed on a positive note during Friday's special Diwali Muhurat trading session, rising 0.4% each at 24,304.35 and 79,724.12 points respectively. The two indices have gained 24% and 22% respectively in Samvat 2080, the highest since Samvat 2077. During the year, the Nifty 50 hit record highs in 78 out of 242 trading sessions, according to data from Capitaline.

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Experts said Samvat 2081 will be a stock picker's market, highlighting the importance of careful selection in an environment where return expectations are likely to be more subdued as compared to previous years.

Rahul Singh, chief investment officer of Tata Asset Management, said that going ahead, “Alpha generation will be increasingly driven by stock selection rather than sector selection”. He explained that strong macroeconomic indicators are currently being offset by cuts in earnings forecasts. This, he said, could lead to a consolidation phase where thematic trends fade and a more bottom-up approach takes over.

Right stock over right sector

Gaurav Dua, senior vice-president & head, capital market strategy, Sharekhan by BNP Paribas, agreed that selecting the right stock, rather than the right sector, will be key. “Even as the multi-year outlook for the Indian economy and markets continue to be positive, Samvat 2081 could see moderation in returns driven by global uncertainties and slowing growth in earnings domestically,” he cautioned.

Vetri Subramaniam, chief investment officer of UTI Asset Management Co., said, “The key point is that you've essentially borrowed some future returns—that’s the reality. Be aware of this if you're considering selling your position”.

Moreover, expecting to achieve returns that exceed earnings growth from this starting point is a risky assumption, he added. “Your best guess for returns will likely align with earnings growth. However, given that the valuations are currently high, there’s a possibility that returns could dip below earnings growth if valuations start to normalize,” he explained.

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Taking a valuation-based approach, Vetri feels much more comfortable with large-cap stocks. In contrast, his comfort with mid and smallcaps is limited, largely because their valuations already account for anticipated future growth.

Nilesh Shah, managing director at Kotak Mahindra AMC, stressed that within equities, investors should prioritize quality over momentum, favour large-cap stocks over midcaps and smallcaps, and concentrate on reasonable valuations rather than expensive ones as they move forward.

Mid-, small-cap show

When comparing the returns of Indian equities to other asset classes, gold delivered a 32% return, while silver saw a 39% increase in Samvat 2080. The rupee declined by 1%, and 10-year bonds by 5%. However, BSE midcaps and smallcaps stood out as the top performers, soaring over 40%, according to Capitaline data.

Shah believes that replicating the returns of the past five years will be challenging over the next five years. “Therefore, it’s essential to moderate our return expectations,” he said.

Vipul Bhowar, senior director, listed investments, Waterfield Advisors is of the view that inflationary pressures, geopolitical uncertainty, and the potential for a global economic slowdown may lead to further market corrections. “In this context, investors should focus on capital preservation and anticipate modest returns for Samvat 2081.”

He believes sectors related to domestic growth themes—such as financials (particularly insurance), consumption (including real estate ancillary sectors), power (notably renewable energy), and healthcare to perform well.

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Among all sectors, the top performers in the last Samvat were Nifty PSE, Nifty Realty, Nifty Healthcare index, Nifty Pharma, and Nifty Auto, fetching 44-60% returns. On the contrary, Nifty Media, Nifty Private Bank, Nifty FMCG, Nifty Bank and Nifty Financial Services have been the biggest laggards.

Siddhartha Khemka, head of research, wealth management, Motilal Oswal Financial Services, pointed out that “Markets are moving towards defensive sectors to offset the volatility rising due to various headwinds”.

Discretionary consumption is expected to benefit from swift changes in consumer purchasing behaviour, shifting from unorganized/local channels to organized ones. The ongoing festive season, along with a better-than-anticipated monsoon from July to September 2024, has led to a surge in rural consumption, serving as a near-term catalyst for enhanced economic activity.

In healthcare, domestic business remains strong, driven by niche product launches. Additionally, financial sector valuations remain favourable, and with growth visibility improving in the coming quarters, Khemka anticipates that this sector will outperform. “Apart from these sectors, niche sectors like jewellery, electronic manufacturing, electric vehicles, renewables, e-commerce, and digital themes are expected to experience significant growth,” Khemka said.

Amid rate-cut cycle

Samvat 2081 begins as a global rate-cut cycle gets under way. With more cuts likely ahead, investor sentiment is expected to remain buoyant.

“RBI has switched to a “neutral” stance in response, hinting at potential rate cuts in the next 6 to 9 months. We anticipate one to two rate cuts from the RBI in Samvat 2081, contingent on inflation and growth dynamics,” said a Yes Securities (India) report dated 28 October.

“Although FII outflows have touched peak levels as of now, FII (foreign institutional investors) holdings as a percentage of market capitalization are way below the levels of the 2003-2007 cycle flourish,” the report highlighted. “We reckon declining risk-free rates and stable Indian Rupee will attract significant FII inflows, especially given the limited opportunities in sluggish markets like China. Clearly, India is in a long-term structural bull market, marked by manageable corrections along the way.”

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According to NSDL data, FIIs purchased Indian equities worth ₹82,414 crore, while domestic institutional investors (DIIs) acquired ₹4,62,069 crore in shares from the start of Samvat 2080 through 31 October, 2024.

All things considered, the US elections will be a crucial event for investors to watch in the new Samvat. Experts assert that market returns are primarily driven by the overall economic landscape and the policies of the governing party. Thus, understanding the positions of each candidate or party is important for evaluating their potential effects on different sectors.

The US 2024 election campaign has entered its final week, with elections scheduled for 5 November. Opinion polls are exceedingly close, making it challenging to forecast the outcome.

“The Democratic nominee, Vice President Kamala Harris, and the Republican nominee, former President Donald Trump, are running neck-and-neck in both national polls as well as in key battleground state voter surveys,” said a JM Financial Institutional Securities report dated 31 October. State level vote is the most important, as the presidency is decided by the outcome of Electoral College. In most cases, the candidate who wins a state wins all of the electoral votes of that state, it read.