CapitalMind CEO says Trump’s policies may have a more significant impact on China than on India
Since the beginning of October, foreign institutional investors (FIIs) have pulled back from Indian equities, selling over Rs 1.55 lakh crore. This sell-off has led to a sharp decline in India's benchmark indices, which had reached new heights earlier this year. A combination of sluggish corporate earnings and high interest rates has dampened market sentiment. Amid this, the outlook for India's stock markets remains a topic of significant debate.
In a candid conversation with Outlook Business, Deepak Shenoy, CEO at CapitalMind and a seasoned market expert, explains the factors behind the current market sell-off, overvaluation concerns, potential impact of a prolonged interest rate hike and the broader implications of global political developments. Shenoy also shared insights on the sectors poised for growth and the long-term prospects of the Indian economy.
Despite the ongoing growth of India’s economy, foreign investors have been pulling back from the markets. What factors do you think are contributing to this sell-off?
The sell-off in the markets is not related to India’s economic fundamentals. Several factors have contributed to this trend. One is the new regulations on Foreign Institutional Investors (FIIs). For instance, FIIs owning more than 10 per cent of a company need to disclose their ultimate beneficial owner (UBO). Although these regulations have been in place for a while, they are now being enforced, and this may have led to some selling, as FPIs may not want to disclose such details.
Another factor is the rising interest rates in the United States, which have increased substantially over the past two years. As US funds need to generate positive returns, they may have reduced their exposure in favour of other assets.
Despite these factors, India remains a growing economy with significant potential. Foreign investors do not sell because they see no value. Even on days when there is selling pressure, we are still witnessing significant positive movements in the market, indicating that the outlook for India remains favourable.
Despite the sharp downtrend in the markets, concerns about overvaluation in certain segments persist. What is your perspective on this?
The market always has overvalued and undervalued pockets, and just because something is overvalued does not mean it has to fall, and vice versa. The next sector that performs well cannot really be predicted until it actually starts performing.
You will see some sectors underperforming or falling less than others. For instance, certain private-sector banks might perform relatively better, but again, these observations do not form a clear trend that can be extrapolated. The market is currently in a phase where no clear trend has emerged. Many individual stocks are doing well, but predicting the next big winner is not easy right now.
Could the prolonged absence of interest rate cuts put more pressure on the market's outlook?
If the interest rates remain high despite a fall in growth, it could put some pressure on the market. However, historically, when interest rates are cut, the market often reacts negatively at first because it signals concerns about the economy. People worry about what the RBI is seeing and why they are cutting rates. So, rate cuts are not always a clear positive for the markets. Overall, the lack of rate cuts will not significantly affect the market outlook.
With Trump returning to the White House next year, how might his pro-America policies and higher import tariffs impact India's corporate sector and stock market performance?
Trump’s policies may have a more significant impact on China than on India. For India, the bigger concerns will be how we navigate any complexities that come with his administration, such as immigration issues and other policy changes.
While US tariffs may affect certain industries, India already has high tariffs on imports from the US. The trade between the two countries is somewhat balanced, so the impact of tariffs on India is less significant. India does not export much to the US, so this is not a big concern.
The biggest positive for India would come if conflicts in the Middle East and the Russia-Ukraine war were to stop. If those wars were to cease, I believe India would benefit the most.
Given the muted corporate earnings in Q2, are there any sectors that stand out as potential strong performers for the coming year?
At present, there’s nothing specific standing out. We are not seeing any clear indications from earnings reports that one particular sector will perform exceptionally well. Some mid-cap and small-cap stocks are doing well, but there is no clear leader in terms of sectors. Some sectors are struggling, but nothing is standing out as a major growth opportunity at the moment. Even aviation, which many thought could be a strong performer, has not shown impressive results.
Are there any sectors or segments where you still see overvaluations prevailing?
Yes, some sectors are still overvalued, particularly in terms of expectations. For example, many new-age companies have high expectations built into their valuations, so any disappointment in their performance could lead to a sharp drop in stock prices. Similarly, FMCG companies, especially multinational FMCGs, are extremely highly valued. These companies may have strong brands, but their valuations don’t seem justified.
These companies have been overvalued for many years, not just recently. While their stock prices can get even more overvalued, any disappointment in their earnings or outlook could lead to significant corrections.
Can you share some insights into the composition of your Portfolio Management Service (PMS) and the key sectors or stocks you are currently focusing on?
Currently, our portfolio is heavily weighted towards large-cap stocks, comprising about 40-50 per cent of our holdings. Some of our mid-cap stocks have grown so much that they have become large-cap stocks, so our exposure to large caps has increased.
We continue to focus on small-cap stocks in areas like semiconductors and infrastructure. Our core portfolio includes sectors such as digital infrastructure, both in terms of financial services and physical infrastructure. We are also focusing on energy independence, aiming to reduce reliance on crude oil, and supporting domestic manufacturing and consumption. Additionally, we see significant potential in import substitution, particularly in companies that stand to benefit from government initiatives like the Production-Linked Incentive (PLI) scheme.
What strategic philosophy has contributed to the consistent performance of your funds?
Our strategy is two-fold. First, we have a fundamental portfolio that focuses on long-term themes, which has been performing very well, including sectors like energy dependence, domestic manufacturing, and infrastructure.
The second part is our momentum-driven portfolio, which relies on an algorithm that follows momentum. We buy stocks that show strong momentum and regularly rebalance the portfolio to include stocks that maintain momentum. This has been our best-performing strategy over the last five years, although the last six to seven months have seen a decline in momentum.
Both strategies are designed to cater to different market conditions. Surge India, which is our fundamental-based portfolio, remains focused on long-term growth themes. We continue to emphasise sectors with high growth potential in the next decade, like infrastructure and domestic consumption.
How would you describe your overarching approach towards market dynamics?
In the short term, we don’t focus much on market movements. We prefer to wait for more opportunities, and right now, there hasn’t been a significant enough market correction. If you ask me, I would like the market to fall more, as this could create better opportunities.
However, we are extremely optimistic about India’s prospects in the long term. Over the next 10 years, I believe India will experience significant growth, with corporate profits potentially increasing three to four times. We are focusing on companies that have the potential to double their profits in the next three to four years. Even if we pay slightly higher valuations today, we expect these companies to deliver strong earnings growth in the coming decade.
We are looking for opportunities to invest in companies that meet these criteria, and we believe that the next decade will be a very promising time for India’s economy and stock market.