Market focus has clearly shifted towards policy view, with investors closely monitoring the RBI’s monetary policy and the upcoming Union Budget, said Udasi
Market Momentum: After weeks of market bloodbath in October and November, stability seems to be gradually returning to the Dalal Street. While domestic investors did try to hold on to the market with continuous buying, macro indicators and geopolitical events pushed benchmark indices into the red territory.
On top of this, the subdued Q2 performance and lower GDP reading further dampened optimism on the D-Street. However, some still see hope at the end of the tunnel, with positive Q3 expectations fueled by the festive season and a reviving demand cycle.
There's also optimism around Trump's return to presidency, which could be beneficial for India's policy outlook. In an exclusive interview with Outlook Business, Sonam Udasi, Senior Fund Manager at Tata Asset Management, talks about how the policy view might play a major role in the market's trajectory moving forward.
This year seems to have played in two halves: growth in initial terms and stagnation since June. Corporate earnings are slowing and inflation is already a mounting concern. How do you see the market?
The market operates in cycles. Last year's base was high, particularly for sectors like infrastructure and capex-heavy industries. As a result, their performance this year or over the past two quarters, might seem underwhelming in comparison. Moreover, many companies had benefited from margin expansion, but that advantage is now diminishing. This is reflected in both earnings and the broader economic momentum.
In FY24, the results were strong, and while markets are still at highs today, valuations skyrocketed during that period. Now, we are seeing a period of normalization.
Mirroring concerns around earnings, many sectors have corrected, especially since June when the election results came out. There's been significant sector rotation within the market. Defensive sectors like IT and pharma have performed well, as have newer types of consumption, including discretionary or PLI-linked businesses and those with digital business models.
India’s growth story remains diverse, and we're not dependent on just a couple of sectors to drive the economy. Every sector is working to create scale, competitiveness or refine its business model, be it through digital infrastructure, innovative manufacturing, or PLI initiatives. For an investor today, a focused portfolio isn't enough, as any quarter might surprise you. While there may be near-term volatility, if you’re focused on long-term growth, returns will eventually materialize.
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Given this shift in focus toward policy, how do you see the markets reacting to upcoming events like the RBI’s monetary policy decision and the Union Budget in February?
Market focus has clearly shifted towards policy view, with investors closely monitoring the RBI’s monetary policy and the upcoming Union Budget. Looking beyond the immediate impact, if you take a 2-3 year view, the focus in India is on creating global scale & efficiency, improving logistics and supply chain edge, and upgrading infrastructure such as railways and highways. While these outcomes take time, the policy trajectory is clear, and the momentum continues. The ongoing policy focus will encourage further capital flow into sectors aligned with these goals, even as promoters continue to raise capital despite market volatility.
Notably, there’s a new government in the US coming into power in February. So market participants will likely focus more on the policies and measures that will be pursued by them in the coming months. There’s also some hope that the incoming US administration, which has a negative stance towards China, might lead to India benefiting from this shift relatively. While we might face tariff challenges, but we could become more competitive and preferred compared to China, which aligns with the "Make in India" initiative.
From a portfolio construction perspective, the market is becoming more bottom-up. Valuations are no longer cheap, so companies with strong performance metrics will be rewarded more than others. The environment today is less forgiving than during the boom in sectors like defense, railways, and PSUs, where everything seemed to perform well last year. Now, the investor community is more discerning, and the focus is on sector performance and individual company numbers.
The rupee has weakened significantly in recent days, driven by the dollar’s rally. Do you see this as a headwind for India’s growth trajectory, especially for the markets?
Some of the dollar movement has already been priced in. For instance, IT and pharma stocks have benefitted from the dollar strengthening. While India is import-dependent, it’s important to consider the broader global growth context. With global growth slowing in major economies like China and Europe, energy prices aren’t expected to rise significantly. The US is even creating a gas glut, which could help keep energy costs contained.
Contrary, a weaker rupee could benefit India's manufacturing strategy. As we compete for a larger share of global manufacturing, a weaker rupee makes us competitive. Even though our forex reserves have decreased, India remains one of the more stable currencies, which will not go unnoticed by global investors.
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2024 has been a year full of major events. And many D-street players believe that Indian market has shown resilience as compared to global peers. Do you think somewhere there’s a risk of overestimating this resilience?
The world is increasingly becoming more volatile, and I wouldn’t be surprised if similar geopolitical issues arise next year. From a global perspective, India’s relative stability is becoming more apparent. Additionally, sectors like pharma and defense are emerging as significant contributors to export growth.
Looking ahead, India’s potential lies in expanding its defense and manufacturing sectors, alongside the growth of IT and digital services. The country’s resilience isn’t just in surviving geopolitical volatility; it's also in its diversified economic base, which includes a growing working population, especially women entering the workforce. Our per capita income has crossed $2600 and is slated to double in the next 6 years.
How do you view the risk appetite of young investors, and how do you think the mutual fund industry can address this?
There are two important things that have been happening, and they continue to evolve. Our regulators, the RBI (Reserve Bank of India) and SEBI (Securities and Exchange Board of India), have recognized the risks associated with rising derivative trading by individuals and rising leverage in some pockets due to this. The regulators have tightened the rules. There’s also been talk of imposing net worth criteria to limit F&O trading to investors who meet certain financial requirements.
This tightening of regulations is a positive sign. While we may experience market volatility or a dip in growth in a quarter, I don't foresee a major risk to our financial institutions. For example, last year, brokers were under scrutiny for incomplete KYC, which is a good step forward. Those who attempt to circumvent regulations will face consequences. These regulatory steps indicate we’re heading in the right direction.
The mutual fund industry has responded with innovations like passive funds and ETFs (Exchange Traded Funds). These are simple investment options with low costs and cater to evolving investor needs.
Nearly five years after the pandemic, much has changed in the Indian stock market. How has your portfolio composition changed during this period?
Our portfolio has evolved significantly over the last five years, with greater frequency. The information arbitrage between professional investors and others has narrowed considerably, so staying ahead of trends has become crucial.
Earlier, portfolios were largely centered around consumption, banking, and IT sectors. But now, we have expanded our focus to include other emerging sectors like pharma, chemicals, manufacturing themes, renewable energy, and EVs. As these industries evolve, they may be more volatile until they scale, but they represent significant opportunities in the long run.
During the pandemic, the portfolio was more defensive, but as markets recovered, it became more aggressive. Today, the portfolio is more balanced, including both growth and value elements. It’s all about flexibility and adaptability in a constantly changing market environment.
New-age companies have been the preferred choices of D-street during their debuts, despite initial skepticism about their governance and growth models. What’s your current perspective on these companies?
When companies like Zomato, PB Fintech, Nykaa, and Paytm etc first got listed, there was a lot of excitement, but none of them were profitable at the time, except for Nykaa, which was marginally profitable. However, over the last few years, these companies have made significant strides in terms of profitability. They have moved from burning cash to becoming profitable at the operational level, which has given investors more confidence in their long-term viability.
These companies have understood the importance of sustainable growth, which makes them more entrenched in their respective markets. They are no longer seen as speculative plays, and that’s why they’re gaining investor confidence. The market will continue to scrutinize new-age companies, but as long as they evolve to focus on profitability and a solid business model. This trend if it continues, it can create future giants.