'India has always been a bottom-up stock-picking market, and as growth recovers with higher liquidity, mid and small-caps always tend to outperform.'
Despite the sharp up move from this year's lows, the Indian markets are still trading at close to their long-term valuations and there is a case for a further re-rating, says Rajat Rajgarhia, MD & CEO, Motilal Oswal Institutional Equities.
In an interview with Sundar Sethuraman/Business Standard, Rajgarhia says high growth environment and peaking of interest rates create a fertile ground for equities.
Inflows from foreign portfolio investors (FPIs) into domestic equities have topped Rs 1 trillion so far in calendar 2023. What is the trigger for such large flows?
The past few months have seen huge buying from FPIs after a period of big selling since late 2021.
The expectations of rates peaking have underpinned these inflows.
India's macroeconomic factors are quite stable. Corporate earnings are resilient and diversified.
Increasingly, India's weighting is on the rise in global allocations as the size of the economy and markets have grown.
Over the next five years, we are likely to see even larger allocations, weightings and capital flows into India.
Also, contrary to popular perception, India isn't the best-performing market in 2023.
We just managed to break the earlier highs after remaining largely range bound for 18 months.
Markets have rallied nearly 15 per cent from their 2023 lows. How do you see valuations at this juncture?
Currently, markets are trading closer to their long-term averages.
An important thing to note is that they generally don't trade at their average valuations.
The average itself is computed on the swings of the indices on both ends.
In a pro-growth environment and expectations of peaking of interest, valuations always can see more re-rating.
In such phases, investors do a lot more sector and stock rotation.
Over the next 3-5 years, earnings growth can be the base case returns.
Do you expect the rally in mid and small-caps stocks to continue?
In 1QFY24, the BSE Midcap Index rallied by 20 per cent, while Smallcap Index rose by 21 per cent.
Liquidity has been in abundance and that has played a major contributor.
India has always been a bottom-up stock-picking market, and as growth recovers with higher liquidity, mid- and small-caps always tend to outperform.
This market is seeing participation from all segments, be it FPIs, domestic institutions or retail.
When do you expect the rate hikes to peak in the West?
We are at the end of this rate hike cycle. Indian rates have already peaked, with the Reserve Bank of India on a pause now, while the US may see one or two more hikes.
Rates have risen significantly over a period of 15 months.
Elevated rates for a longer time will have an impact on the inflation, which has already been showing signs of moderation both, in the US and India.
Markets are always forward-looking, so they will begin to pre-empt if the rate cycle sees any easing in 2024.
What's your earnings forecast for FY24 and FY25? Which sectors will be the key contributors to this growth?
In FY23, MOSL Universe earnings grew by 10 per cent year-on-year, post a strong rebound in FY21 and FY22.
Over the next two years, we are expecting earnings to grow 17 per cent annually. The large contributors to this growth will be led by financials, energy and auto.
Which sectors are you bearish and bullish, and what are the reasons for the same?
We are positive on financials as the growth outlook is good and valuations are reasonable.
NBFCs and autos can benefit from a favourable macro environment.
Manufacturing remains a multi-year theme and many sub-segments will emerge during this cycle.
Among our key underweights are IT, global commodities and staples. Earnings growth will remain sub-par for them driving more consolidation in FY24.
IPOs have yet to revive despite improved sentiments in the secondary market. What's the outlook there?
Primary markets see a revival once the broader markets rally. We are seeing early signs of IPO markets opening up again.
The last few weeks have seen strong responses to the primary issuances with strong listing gains also.
In our view, the coming months will see positive responses to the primary markets again.
Last few months have seen a hectic activity on the block deals as many investors could exit stocks, and new investors found it more convenient to get good allocation.
What's your assessment of domestic flows into equities?
Indian equities have been resilient during the last many years, largely driven by domestic flows.
We think that multiple factors have led to a structural higher allocation of the domestic savings pool into equities.
This trend will continue and may pick up further over the coming years.
Fixed deposits continue to get a very large share of savings, and that trend may remain intact at the current interest rates.
How do you think the markets will behave as the general elections near? What key things will investors look for?
Markets are expecting that the current government will return back to power, which means stability and continuation of economic policies.
Even though this event will be in 2024, several key states are up for elections over the next six months.
These states will also give some cues for the 2024 elections.
Feature Presentation: Aslam Hunani/Rediff.com