In the current month, Indian markets continued to remain healthy aided by strong domestic equity inflows. Continued domestic traction driven by clearer signs of recovery in private capex and rural cycle along with lowering of crude oil prices acted as key levers. Also, the pre-emptive US Federal Reserve rate cut of 50bps along with further rate cuts to help in soft landing of the US economy also aids the expectation of domestic rate cut cycle for early 2HFY24.

Despite benchmark indices close to lifetime highs, we have seen some correction in the broader market lately. The softness was due to the aggressive selling by FIIs (nearly USD 3bn in the last two weeks) on the back of China trade as the later announced a series of monetary stimulus and the heightened tensions in the Isreal - Lebanon conflict. Also, aided by the above-mentioned factors, leadership in terms of sector outperformance has shifted from IT services, PSUs and Pharma to private banks, consumption and real estate.

Globally, the US Federal Reserve cut policy rate by 50 bps to 4.75%–5.00% (in-line with consensus) as there is greater confidence that inflation is sustainably moving towards its target and risks to achieving its employment and inflation goals are roughly in balance. In summary of the economic projections, it expects another 50 and 100bps interest rate cut in CY24 and CY25 respectively. Contrary to the past rate cycles in the US, the current one is a pre-emptive one which may support growth in the US economy thus aiding in a scenario of a macro goldilocks economic environment. China's central bank has also announced a series of monetary policy measures aimed at boosting an economy grappling with strong deflationary pressures.

In the face of global backdrop, high frequency indicators in India are suggesting some moderation in growth even though overall momentum is still decent and India remains the fastest growing major economy globally. Indian PMIs (both services and manufacturing) are running high with manufacturing PMI strongest in peer Asian region and IIP growth resilient. Earnings The GDP growth in this cycle (post Covid) has been initially led by investments supported by government capex and the housing sector, with green shoots of private capex now also visible. However, with the incumbent government's weaker than expected performance in key States and with different priorities of its alliance partners, there can be increased focus on welfare schemes and address the demand side equation which should benefit the overall consumer space. Separately, the consumer sector is also recovering from a low base along with early signs of rural recovery helped by above normal monsoon. Hence, the overall set-up for the consumption sector, especially the consumer discretionary sector, which has not done too well in FY24, looks promising.

In its latest meeting, RBI MPC kept the repo rate unchanged and unanimously voted for change of stance to 'neutral' and to 'remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth.' We believe evolving growth conditions will drive incremental policy bias. We believe that the MPC laid the groundwork to cut rates at the upcoming meeting as they gain greater confidence on inflation and signs of some growth softening.

Amidst the market volatility, domestic equity flows continue to be resilient with SIPs, EPFO, NPS, and Insurance averaging USD 5 bn on monthly basis. The other point is that any meaningful market correction, is likely to result in increased foreign buying given that the data now suggests that global emerging market investors are underweight India for the first time in a decade. This is the result of both India's neutral weighting rising because of its outperformance and foreigners' ongoing reluctance to buy aggressively because of the prevailing high valuations. FIIs cannot afford to ignore India for long and with USD likely to weaken on further rate cuts in US, we would expect FII inflows to improve in the coming months.

Post-Covid-19, corporate earnings growth has been strong with more than 20% CAGR, however, as the base effect and efficiency gains plateau, going forward corporate earnings will moderate but should clock low teens growth. The big difference between the pre-Covid-19 period and now is that growth is more broad-based, driven by many sectors where the outlook is improving.

From a sectoral viewpoint, we believe earnings growth will be driven by Banks, Autos, Capital goods, Consumer durables, and Real Estate. Discretionary consumption is still below its pre-Covid-19 peak and with inflation on a declining trend, we should see a pickup in discretionary consumption as well.

In the last two years, large cap stocks have significantly under-performed the midcap and small caps. Large cap stocks ratio to total market cap is lower versus previous periods while share in total profit pool has improved continuously over the last few quarters. Also, the relative valuation of large cap stocks vis-a-vis Small and Midcap is at historical lows. All these data points make us believe that risk reward favors large cap stocks and hence would advise more allocation to large cap biased funds. However, we continue to be believers in mid and small cap names from a longer-term perspective as India growth story remains on track.

Also, with interest rates at their peak and expectations of moderate equity returns from current levels, fixed income looks attractive. We remain overweight on duration and are targeting a move to 6.5% on the 10-Year Gsec and advise investors to add duration to their portfolios through short-term funds (Short-term fund, corporate bond fund, and Banking & PSU fund). Overall, from a portfolio perspective, risk reward seems balanced across asset classes, hence, a multi-asset allocation approach with exposure to Equity, Fixed Income, and Gold continues to remain well-suited for the coming year.

Source: ABSLAMC Internal Research

MPC: Monetary Policy Committee
PMI: Purchasing Managers' Index

The sector(s)/stock(s)/issuer(s) mentioned in this presentation do not constitute any research report/recommendation of the same and the Fund may or may not have any future position in these sectors)/stock(s)/issuers).

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