Daily Voice | Future Generali CIO bullish on these 5 sectors for FY25, cautious on fintech space

Future Generali India Life Insurance Company Chief Investment Officer Niraj Kumar says opportunities in the fintech space are exciting but investors should be aware of the inherent risks in the segment while investing and not just “follow the euphoria”

Kumar, who has more than 20 years of experience managing fund, says the power sector looks attractive with increased allocation in the budget and thrust on the renewable energy space.

In an interview to Moneycontrol, he also talks about what will drive the RBI’s decision to cut rates and how FY25 is looking for markets after this year’s record run. Edited excerpts:

As we head into FY25, do you think the market will focus on rate cut cycle?

The narrative for FY25 will be dominated by global growth slowdown, inflation trajectory treading lower towards central bank target and monetary policy outcomes in major economies. Bond yields across economies have come off their peaks and started pricing in imminent rate cuts in 2H 2024 as a culmination of lower inflation prints and softer patches of growth.

With soft landing in the US being seemingly more realistic and inflation moving closer to its target, we reckon the Fed is likely to embark on rate-cut cycle in 2H 2024 by cutting around 100 bps (basis points) in 2024, with other central banks following suit including RBI.

From domestic standpoint, too, we believe the rate cut cycle is likely to be a shallow one, given the relatively better managed inflation and resilient growth. The RBI is likely to cut rates by around 50 bps in 2024. However, strong US macro prints and any new geopolitical conflicts may delay the timing of rate cuts.

Nonetheless, holistically, the landscape for Indian bond yields in FY25 indeed appears on a strong footing with goldilocks macros in terms of lower inflation, resilient growth, contained CAD (current account deficit), prudent fiscal stance and tailwinds emerging from strong FII flows with bond index inclusion on the horizon.

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Will the RBI focus on bringing inflation below 5 percent before changing its policy stance?

As emphatically stated by the RBI, the stance change will be a more holistic approach encompassing all the imperative policy parameters than being linked just to one singular factor. We reckon the RBI will look to signal change in stance when it sees inflation is treading lower around its target level of 4 percent on a durable basis, which is most likely to be the case in H2 CY25.

Any premature departure in policy shift may send out mixed message to the market and impede the current transmission process and undo all the important policy actions of RBI.

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Which are the sectors to look at for FY25?

With the interim budget FY25 and the government continuing the course of building structural growth enablers such as infrastructure and sustained push towards green energy transition, we reckon the key beneficiaries in terms of sectors would be domestically focussed sectors such as infrastructure (which includes roads, highway, railways and urban infrastructure) & construction and allied sectors such as cement and auto.

The power sector is another space which looks attractive with increased allocation in the budget and thrust on the renewable energy space. While agri and rural-spend push was missing in the interim budget, sustainable rural recovery would be the key trigger for FMCG space.

Also, sectors oriented towards green transition and electrification are also likely to remain attractive, with selective global plays focussing on emerging themes like de-carbonisation linked capex and EVs (electric vehicles).

Besides, the fiscally prudent Interim budget and a turn in rate cycle would be positive for the Indian financial sector especially NBFCs which are key beneficiaries of the falling interest rate cycle, as it would entail lower cost of borrowings.

In FY24, so far, the market delivered more than 25 percent rally. Do you expect a similar kind of performance in FY25?

The domestic equity market rally has been facilitated by sustained earnings growth, favourable macros, political stability and still favourable liquidity domestically as well as globally. While markets have touched record highs, we believe some consolidation in the interim is likely. We believe the period of easy returns as seen in the last one year for markets is clearly behind us and hereon, return expectations are likely to be moderate and more realistic.

We see limited triggers for a significant rally, though a turn in the interest rate cycle will favour equity market valuations. Since FY24 has seen a broad-based rally, especially in the broader indices, we expect FY25 to be a function of corporate earnings growth, policy continuity and any disappointment on earnings growth front, policy outcome and geopolitical conflicts may follow with a negative reaction marring the market momentum.

Overall, we expect equity market returns to be close to historical average (in line with moderate earnings growth) but believe the market is likely to see divergent trends across sectors and hence, one needs to be cognisant of selecting the theme/sector/stock selection.

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What is your reading of the Paytm crisis and are you worried about the fintech space?

Fintech, as a space, is going to be here as the market size is huge and the opportunity that exists for these companies are unparalleled. While the opportunities in this space are exciting, investors need to be cognisant of the inherent risks in these segments and be disciplined in their approach and not follow the euphoria.

Investors must keep in mind that the business model of these companies has thrived on disruption and hence a new challenger or new type of business disruption, especially regulatory, is very much possible and can be a big risk to some of these businesses as well.

Hence, investors need to be very careful and selective while participating in this space.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.