September Strategy: Market performance will be driven by more bottom-up stock ideation, says ASK Investment Managers

Global equities rose by 1% in August, despite various macroeconomic challenges and recession concerns. The Bank of Japan (BoJ) raised interest rates to 0.25%, signalling a hawkish policy stance and triggering the unwinding of carry trades. This move, coupled with rising geopolitical tensions between Israel and Iran and growing fears of a US recession, initially led to a market sell-off in early August. However, improved macroeconomic data eased recession fears, helping markets recover. While many equity markets initially declined, with Japan facing its worst crash since 1987, several have rebounded.

In this context, Nifty50 also recovered, rising over 1%. However, midcaps and small caps saw declines of 0.7% and 0.3%, respectively, for the month. Most sectors corrected by 1-7%, with Real Estate, PSU Banks, and Utilities experiencing the most significant drops. In contrast, defensive sectors like FMCG and Pharma performed well, gaining 2% and 3%, respectively.

Moreover, the first quarter results of FY25, which concluded recently, presented a mixed bag for various sectors in the Indian economy, as companies navigated through a range of macroeconomic and sector-specific challenges. While some industries thrived on robust demand, others faced headwinds due to external factors such as regulatory delays, extreme weather conditions, and subdued consumer sentiment.

Strategy

Despite these challenges, there is cautious optimism for the medium term, driven by strong inquiry levels across industries and improving demand trends, ASK Investment Managers said in a recent note.

One notable trend in Q1FY25 has been the converging performance of companies across market capitalizations, it said in the note. Operating profits, excluding the Oil and Gas sector, have ranged between 10-16 percent, with small-cap companies at the lower end of this spectrum.

The Investment Manager believes that the market performance will be driven by more bottom-up stock ideation from here on. Also, divergence in performance across market caps and ownerships should reduce, according to the note by ASK Investment Managers.

It further noted that markets are supported by the expectations of strong corporate performance. India Inc has the ability to deliver mid-teens earnings as compared to the past. Markets are a juncture, where globally economies are not in recession, but there is no strong recovery either.

"So, markets will continue to fight this ‘ying yang’. We believe a particular style investing may not work, but a high focus will be on stock picking, based on secular long-term businesses with execution prowess and not necessary on mean-revision or cycles," according to the Investment Manager.

ASK has listed key sectors to look out for in September.

Sectoral Trends in Detail

Manufacturing/Infrastructure or Investment-Driven Businesses: As per the ASK, the manufacturing and infrastructure sectors showcased varied performance in Q1FY25. Utility companies reported robust results, fueled by increased power demand and higher volumes sold through e-auctions. However, infrastructure companies faced execution-related challenges, primarily due to labour shortages and delays in regulatory clearances amid ongoing union elections. Despite these hurdles, the order backlog continued to grow, albeit with temporary delays in inflows, it said. It further noted that companies remain optimistic about the medium-term outlook, with strong inquiries across industries such as data centres, railways, metro projects, electronic manufacturing, power, and water treatment, signalling potential growth opportunities.

Consumer-Related Areas: In the consumer-related sectors, the post-election period saw the government intensifying its efforts to enhance skill development and employment, which is expected to bolster the rural economy, stated the Investment Manager. La Niña conditions are also anticipated to positively impact rainfall, further supporting rural growth. The IT sector, after more than six quarters of subdued hiring trends, is showing early signs of revival. However, the FMCG sector faced challenges, with extreme heat waves affecting out-of-home mobility and impacting product offtake, it noted. Nonetheless, there was a marginal improvement in rural markets, and a normal monsoon is expected to further support it, added ASK.

Consumer Discretionary: It further pointed out that the consumer discretionary sector experienced a mixed performance. Paint and Quick Service Restaurant (QSR) companies reported Q1 numbers below expectations, attributed to soft demand. On the contrary, alcoholic beverage companies surprised the market with strong profitability. Consumer electrical companies also posted healthy results, driven by robust demand for summer-related products like air conditioners, with improving trends in other appliances such as washers and refrigerators, it said. Fashion retailers, however, faced weaker trends due to subdued demand and a lower number of wedding days during the quarter, though this trend may reverse in the upcoming quarters. Overall, after a period of weak demand, there is an expectation of broad-based improvement in consumer discretionary sectors, as per ASK's forecast.

Information Technology (IT): As per the report, the IT sector continued to experience slow growth in Q1FY25, impacted by the challenging macroeconomic environment, including rising interest rates and economic pressures. These factors have led to cautious customer behaviour and reduced discretionary spending. Despite these challenges, ASK said that there is a relative improvement in client spending in the financial services sector in North America, providing some relief to IT companies.

Pharmaceutical: It further stated that the pharmaceutical sector performed in line with expectations during Q1FY25. Domestic businesses saw growth, supported by chronic, acute, and in-licensing opportunities. In the US, generic businesses experienced relatively lower price erosions, which contributed to stronger earnings growth. The sector’s stability in performance indicates its resilience amid broader economic challenges.

As we progress through FY25, the Indian market is at a critical juncture. While global economies are not yet in a recession, neither are they experiencing a strong recovery. This delicate balance presents both challenges and opportunities for investors. In this environment, a focus on stock picking, particularly in companies with secular growth prospects and solid execution, will be key to navigating the market's 'ying yang.' Despite the mixed performance in Q1, the underlying strength of India Inc. and the potential for mid-teens earnings growth offer a promising outlook for the rest of the year.

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.