Summary
Global
- As US cuts rate, funds will flow towards EMs for higher yields in Equities/Debt wherever there is opportunity.
- Oil prices (and other commodities) remain subdued in spite of geopolitical escalations, production cuts primarily due to Chinese slowdown.
- Low oil prices – negative due to impact on export, positive due to building infra etc at lower cost.
- Key risks – geopolitical and middle east
Domestic Economy
- Strong macros – CAD, inflation, GDP growth, e-Way bills, GST growth, good monsoon, strong credit growth at 13%…
- Government, corporate and upper-class balance sheets strong, lower class challenged due to covid, inflation and job losses.
- We are in the middle of the cycle – public capex – private capex – full-fledged real estate cycle – full-fledged consumption cycle…but pace is slow….
Earnings growth and valuations
- Earnings to moderate with a volume growth of 9-11% if unlike last FY, if margin expansion is absent.
- Market pricing Nifty earnings 12-13% and small and midcaps 15-16%. Q1 earnings growth was 5-6% and 11% without oil, therefore Q2 earnings are important to achieve the expected earnings growth.
- Last 2 years earnings growth was in domestic cyclicals, pharma and telecom where now valuations have turned expensive. Earnings in Global cyclicals and domestic consumption which were soft, seem to be catching up. Given the under ownership these sectors can surprise on the upside.
- Valuations are rich, Nifty at 21 times FY 26 earnings, and mid and small caps at 26 – 32 times of FY 26 earnings and there is no space for earnings disappointments.
Our Portfolio construct
- Overweight on non-lending financials like market infra, insurance, autos, telecom, pharma, industrials, Equal weight on FMCG, IT and underweight on energy, commodities.
- Increased allocations to IT, consumer staples, NBFCs, decreased industrials, domestic cyclicals, banks, while hospitals, telecom, aviation remaining same.
- FY 25 view
- Earnings will normalise, will become narrower (due to no margin expansion this year and lower revenue growth). Quality will outperform
- Overvaluations in PSUs should moderate as more than delivery is factored in today.
- Relative underperformance in earnings of Banks, financials, IT and chemicals may go away due to base effect.
- Consumption fund – a broad diversified theme with presence across sectors except IT and industrials
- Multicap fund – Good fund for SIP providing for exposure to large, mid and smallcaps.
- Manufacturing Fund – Again a broadly diversified decadal theme.
- Consumption, Mutlicap and manufacturing fund good for SIP, however better to invest lumpsum in hybrids like Balance advantage fund.
