Kotak AMC: ETMarkets Fund Manager Talk: Maintaining Earnings Growth Over The Next Years Is Crucial For Markets: Shibani Sircar, Kotak AMC

The $4 billion sales by FIIs have made India the worst market in the world. Do you think this reversal will last long and hurt absolute returns for investors?
On a dollar basis, Indian equities have underperformed other emerging markets after significantly outperforming over the past year.

However, with this near-term underperformance, some of India’s premium valuations relative to emerging markets have pulled away from last year’s highs. Absolute valuations have also corrected and are now closer to the long-term average.

At the macro level, growth in India continues to be an outlier in the global context. It is therefore possible that while China looks tactically attractive, India remains structurally strong.

We believe the market will remain rangebound and volatile in the near term given domestic and global headwinds, although our medium-term outlook is constructive. Therefore, it is important to look at stocks in sectors where earnings are clear or growth potential is obvious.

The budget has given a greater boost to investment spending. With that in mind, which sectors are you most bullish on and would increase your exposure to?
Like a jack of all trades, the Union budget has somehow managed the difficult task of being a progressive pro-growth budget while keeping the budget deficit under control and does not resort to grand populist measures.

From a sector perspective, we remain positive on domestically oriented sectors such as financials, infrastructure, manufacturing, capital goods and autos. In terms of domestic cyclicals, given the budgetary boost, we expect public investment growth to continue with a focus on roads, rail, water and defence.

Against a backdrop of higher government spending, do you see private sector capital spending picking up in FY24?
Given signs of improvement in overall capacity utilization, we expect private sector investment to be likely to improve in the medium term. In addition, manufacturing is benefiting from the supply chain shift away from China and Europe.

In view of the political push, we assume that core industrial investments will also gradually recover. The sector is benefiting from tailwinds from the government focused on Aatmanirbhar Bharat.

Investments in new sectors such as renewable energy, battery storage and green hydrogen, as well as the trend to indigenize defense are attracting investment to meet sustainability goals.

What are your takeaways from the Q3 results announced so far? How do you think FY24 will pan out for India Inc?
At the Nifty level, gains were broadly in line with expectations. Gains were driven by the auto and BFSI sectors, while metals and oil & gas were the main detractors.

Without oil and gas and metals, Nifty 50 companies’ earnings would be much better. However, at a broader market level, gains have experienced wide dispersion between stocks. Overall, margins appear to have bottomed out as commodity prices fall.

For the markets, the earnings trend must continue not only in this quarter but also in the years to come. Some of the most important factors to watch for are trends in discretionary consumption and demand, any improvement in the rural demand curve and the margin curve.

So far in fiscal 23, we’ve seen modest single-digit downgrades to Nifty’s earnings estimates, while consensus expectations for fiscal 24 remain robust with earnings growth in the mid-teens.

IT and related sectors are seeing massive layoffs as the threat of a global growth slowdown looms. Will this significantly change investment behavior in this sector in the short to medium term?
Technology as a sector has borne the brunt of a global macro slowdown. Revenue growth, which accelerated during COVID, is now normalizing to long-term averages in the high single digits.

The deal mix is ​​changing from short-term discretionary spend to cost-effective projects, and it’s likely that we’ll also see vendor consolidation.

On the other hand, margins are expected to gradually improve with lower turnover and labor cost pressures.

Valuations in the sector have also weakened over the past 6 months. At current valuations, Indian IT large caps appear to be better positioned to weather the challenges at the industry level than mid caps.

Given that India will be an underperforming market in the near term, what type of asset allocation do you recommend for investors?
Investors should continue to adopt a disciplined investment approach and formulate their asset allocation strategy based on their risk tolerance, investment objectives and time horizon. In terms of equity, a tiered approach to investing through either the STP or SIP route is best.

(Disclaimer: Experts’ recommendations, suggestions, views and opinions are their own. These do not represent the views of Economic Times)