This has perhaps been nothing short of a dream year. We may have seen bigger years like this in the Covid comeback but in terms of the real wealth creation, this really has been a great year. What should be the strategy as we step into 2024 now?
Clearly, fundamentals, flows as well as sentiments have all turned positive. We seem to be in a very bullish mood in the very short term. But at the same time, we should also remember that rising tide takes up valuations of almost every stock with respect to fundamentals. So, to that extent, one should keep an eye on the fundamentals as well and the relative valuations.
As far as we are concerned, we continue to believe that if you stay invested in Indian equities for the next three-five years, you are definitely going to make reasonable returns. Probably if you are in largegaps, this year, the risk reward will be more favourable given that largecap valuations are more or less around the fair value of long-term range. As far as mid and smallcaps are concerned, they are definitely higher than long-term averages, so to that extent the earnings delivery in that basket will be crucial for the valuation to sustain. Overall, within equities, we prefer a little bit of largecaps at this point of time.
And within largecaps where is the preference?
Clearly, there is no sector which is very attractive from a valuation perspective. But if you look at how short-term performance has been, how ownership has shifted, banking and financials could be one sector within largecaps, where there is relative valuation comfort. The sector has not done much. Probably NBFCs have done a little better than banks and especially private banks have not done much. We believe this is one sector where risk reward is favourable for the medium-term to long-term investors.
Similarly, pharma and healthcare could be another segment where there are still some stocks which are reasonable in terms of valuations within the largecap segment.
For banks to do well, the economy has to do well. While the capex cycle is strong, if I look at the data points, what is happening to FMCG sales, what is happening to unsecured loans as a category after RBI’s diktat, how essentially the rural economy is moving? A slowdown is happening. So, how will banks do well if one end of the economy is not growing?
Clearly, there are still issues on the consumption side. Maybe some bit of deficient monsoon adverse impact will be compensated by pre-election focus on rural areas. We still have to wait and see. As for unsecured consumer credit and the issues surrounding that, probably it is more prominent in the fintechs and those who are in the NBFC segment, not so much in the banks. Clearly even with all of this, the credit growth is still the healthy mid-teens kind of a number and there are no asset quality issues. The capital is adequate for further growth. All in all, on a relative basis, banking, especially the private banking segment seems to be better placed compared to many other areas in the market which have run up quite a bit in terms of valuations and also there are similar concerns on growth even in some of those areas.
We were talking with some corporates as well within the FMCG sector and they alluded to the fact that there is an improvement in volume growth and that rural is going to be a key focus area for most of these companies. How are you looking at the overall macroeconomic backdrop with respect to the rate of inflation and the GDP growth impacting some of these consumption related FMCG companies?
In terms of inflation, it is definitely under control. We have seen quite a bit of moderation in the last few quarters and even going ahead, barring some uneven food inflation numbers that may come up temporarily, overall inflation trajectory seems to be well in control. Look at the commodities, especially crude, which has fallen from about $95 to about $75 a barrel. I do not believe that inflation is likely to become a spoilsport in the very short term. In terms of growth, we are already growing at about 7% plus and likely that we will continue to grow at similar levels over the next few years as well. So, broadly, from a macroeconomic perspective there are no big risks at this point of time. The only thing that one needs to keep in mind is the fact that the monsoon has been deficient this year. We may not see a big impact this time around, but if the next monsoon is going to be worse than the usual trend, then definitely the rural consumption trends which are tepid right now can take longer for revival, so that is something that could be in front of us maybe six months down the line.
Another key thing that we need to watch out, while the entire market has been in a bullish mood and lapping up all the QIPs and whatever is on offer, if you look at the first half of this financial year, nearly Rs 1,50,000 crore worth of paper has come from promoters and private equity funds including the IPOs and the secondary out of this, about Rs 1,15,000 crore, which is a very large number compared to the usual trend that we used to see all the time.
So, the question is when retail investors and everyone else is very bullish on the markets, why are the insiders selling so much of their own equity at these values, so that is something that one needs to keep in mind.
