Daily Voice | This investment veteran sees banking and financials trade below median value, despite strong growth

The elections, for sure, make up for one of the six-sigma risks for the market at the moment, with uncertainty over the ruling party's return to power, believes Niraj Kumar, chief investment officer at Future Generali India Life Insurance Company.

Among sectors, the market veteran seasoned for more than 20 years in managing funds, is bullish on India-facing sectors such as infrastructure and construction and allied sectors such as cement and auto.

Banking and financials continue to be in an attractive zone, as the sector continue to trade below the median valuations, despite the strong growth and pristine asset quality that the sector is delivering, he says in an interview with Moneycontrol. This is how the interaction advanced:

Do you anticipate significant impact on earnings growth in FY25 if the oil prices cross $100 a barrel mark?

Prima facie, oil prices crossing and sustaining above $100 a barrel does pose a risk and may have negative ramifications on India's goldilocks macro. It will exert pressure on external accounts and rupee, lead to persistent inflation and further undermine and delay the timing of rate cuts.

From an earnings growth standpoint, evidently, the sectors which directly hinge on crude and crude derivatives may see some cost escalation and a consequent impact on margins. However, a more pronounced impact will be felt from incessant inflation, which will delay rural recovery and curtail earnings growth in related sectors.

Do you think the Fed funds rate cut will be delayed but overall, three rate cuts are imminent this calendar year?

From an interest rate cuts standpoint, evidently markets have tempered down their expectations around quantum of rate cuts, from initial expectations of five-six cuts in 2024 to that of two cuts now in 2024, lower than Fed’s dot plot of three cuts in 2024. This change in narrative largely stems from sticky inflation prints, resilient growth and labour market dynamics.

While the current evolving circumstances with respect to escalating oil prices, geopolitical tensions do impart uncertainty and may delay the timing of rate cuts, we reckon it’s just a matter of time and two-three rate cuts are imminent in 2024.

What are the factors that can bring major correction this calendar year? Do you expect any possibility of a big crash in 2024?

The rally seen in equity markets is clearly a culmination of favourable macro backdrop, sustained earnings growth, expected policy continuity at the helm, and yet favourable liquidity. While 2023 has seen a broad-based rally especially in broader indices, we reckon the narrative for 2024 is likely to be dominated by sustained corporate earnings growth, policy continuity, commodity prices and favorable geopolitical landscape.

Since markets have priced in a ‘picture perfect’ scenario, leaving no room for error in corporate earnings or discount rates or policy front. Any negative surprises may have negative ramifications on the market, especially in Indian Small & Midcap space which have massively outperformed largecaps in 2023. Evidently election risk now is a key six-sigma risk for the market if the ruling party does not come back to power.

What do you like to pick in themes, if there is a major correction in the equity markets?

We are bullish on domestic facing sectors/themes such as infrastructure & construction and allied sectors such as cement and auto. Banking and financials continue to be in an attractive zone, as it’s a sector that is still trading at below median valuations, despite the strong growth and pristine asset quality that the sector is delivering.

We are also closely watching capex-related themes and constructive on power and capital goods sector, owing to revival in capex cycle after an elongated period of under investment. We are also watching railways and defence where a lot of indigenisation is happening, and capex has gone up significantly.

Ordering activity remains robust with most of the companies sitting on highest ever book-to-build ratios which provides robust revenue growth visibility over the medium term. Any corrections in these pockets would portend opportunity for making investments.

Do you think the RBI may not be aggressive in rate cuts even though it starts rate cut cycle later this year after Fed lowers the rates?

We do not see any compelling need for RBI to embark on an aggressive rate cut cycle, given that growth outlook remains strong and inflation trajectory is well on track to be in RBI’s target range. However, uncertainty persisting related to weather, upturn in crude oil prices and geopolitical tensions are likely to inject uncertainties into inflation’s downtrend, thus beckoning RBI to maintain its cautious and wait & watch approach.

Overall, with the likely pivot from central banks and a favourable demand-supply outlook, we expect RBI to follow suit, although rate cut cycle in India is likely to be a shallow one of 50 bps rate cut in 2H2024.

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