We are most bullish on cement stocks, favour consumption sectors as autos, FMCG, Retail, CD- Pradeep Gupta, Anand Rathi

Expert Views: Short-term market triggers are likely to be driven by macroeconomic data, said Pradeep Gupta, Co-founder & Vice-chairman, Anand Rathi Group, talking to Mint. He expects 25bps rate cut by the US Federal Reserve in September'2024 and says these expectations seem to be largely priced in by global financial market. He currently favours consumption-driven sectors, including autos, consumer durables, FMCG, and retail. Among investment themes, remains most bullish on cement stocks, Edited Excerpts

1) What are the key triggers for the markets now?

Until the earnings season begins in October 2024, short-term market triggers are likely to be driven by macroeconomic data releases, particularly those from the US. Key indicators to watch include the growth trajectory, labour market trends, and actions taken by the Federal Reserve and other major central banks including the RBI, all of which will remain crucial for market direction.

2) What are your views on potential rate cuts by the US Federal Reserve, and will it act as a market trigger or is the event already priced in?

We anticipate a 25-basis point rate cut by the Federal Reserve in September 2024, accompanied by a dovish outlook signaling further rate reductions over the next 12 to 18 months. However, these expectations seem to be largely priced in by global financial markets. Unless the Fed surprises with a deeper rate cut or provides unexpectedly hawkish or dovish commentary, we do not foresee significant volatility in the global markets following the decision.

3) What are the downside risks for the markets? Are current market valuations concerning?

Global growth, particularly in the US, has exceeded expectations, and inflation has largely fallen in line with forecasts. The Federal Reserve’s recent dovish commentary, along with a softening yet stable labour market, has instilled confidence in financial markets. However, there is an underlying complacency. A sharper-than-expected slowdown in growth, a more cautious Fed outlook on rate cuts, or labour market disruptions could quickly turn investor sentiment bearish.

Despite various concerns, global equities (excluding China) have performed strongly over the past year, with rallies in some markets outpacing improvements in fundamentals. This raises concerns about current valuation levels. However, Indian equities—especially in the large and small-cap segments—seem fairly valued at present.

4) How should investors approach the markets? Are there sectors or stocks that offer value, and which should be avoided?

Over the long term (beyond three years), equity markets are primarily driven by macroeconomic factors. With India emerging as the fastest-growing major economy over the past decade and a narrowing inflation differential with the rest of the world, macroeconomic conditions remain favourable for Indian equities. We maintain a positive long-term outlook for Indian stocks, supported by a robust growth and stable inflationary environment over the next five years.

In the medium term, markets are more influenced by corporate earnings and valuations. We project large-cap indices to see 11-12% earnings growth in the next 12 months, while mid- and small-cap earnings are expected to grow by 20-22%. Valuation multiples for both large- and small-cap companies appear reasonable on a forward basis. While there is a 10-12% overvaluation in midcap indices, this is concentrated in just 20% of companies, with the remaining 80% trading near fair value.

We currently favour consumption-driven sectors, including autos, consumer durables, FMCG, and retail. Among investment themes, we are most bullish on cement stocks. In export-oriented sectors, we prefer IT and healthcare. Although investment sectors such as capital goods, real estate, and construction have strong fundamentals, their recent price run-up may limit further gains in the next 12 months.

5) How do you expect Foreign Institutional Investor (FII) flows into India to evolve? Is India still an attractive market compared to other emerging markets?

Given India's strong macroeconomic performance, robust corporate earnings, and favourable valuations across much of the equity market, we expect FIIs to remain net buyers of Indian equities.

Historically, India has commanded higher price-to-earnings multiples than most peer emerging markets due to superior corporate earnings growth and stronger return ratios (e.g., return on assets, return on equity). Furthermore, Indian benchmark indices are heavily weighted toward sectors that command higher valuation multiples globally. As a result, we believe India remains an attractive destination for foreign investors compared to other emerging markets.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.