Election volatility over? Axis MF recommends top investment picks for you

Potential volatility after highs, focus on long-term investing & key sectors like consumption, infrastructure, and pharma

With the recent elections concluded, Indian markets experienced a period of volatility alongside gains. As the markets continue to reach new highs, experts at Axis Mutual Fund recommend that investors prepare for potential market fluctuations and consider rebalancing their portfolios.

After the initial bout of volatility on the day of electoral outcome, India equites rose notably over the month buoyed by encouraging economic data, robust flows and optimism around the new government’s upcoming budget. The S&P BSE Sensex and the NIFTY 50 ended 7% and 6.6% up respectively. Amongst other indices, both the mid-caps and small caps gained during the month. The NIFTY Midcap 100 ended the month higher 7.8% while NIFTY Small Cap 100 ended 9.7% up. 

Meanwhile, the equity market capitalisation crossed $5 trillion, with the last one trillion being added in a span of six months. Key frontline indices touched lifetime highs, with the Sensex crossing 79,000 and the NIFTY 50 crossing 24,000. Overall, in the H1CY24, the BSE Sensex advanced 9.4% while the Nifty gained 10.5%. The Nifty Midcap 100 ended 20.7% higher and the Nifty Smallcap 100 ended 21% higher.

After being net sellers for two consecutive months, Foreign Portfolio Investors (FPIs) bought to the tune of $3.2 billion while domestic institutional investors remained strong with inflows of $3.4 billion. For 2024, FPI net buying

stood at $0.4 billion, while domestic institutions were net buyers at $28 billion. Pertinent to mention here, that India officially joined the JP Morgan Global Bond Indices on June 28 and this move will lead to phased inflows of

$25-30 billion.

Market Outlook and Risks:

• Potential Correction: While the Indian economy remains one of the fastest growing globally, Axis acknowledges that some market segments are currently overvalued. This suggests a potential normalization of valuations in the near future.
• Focus on Long-Term: Axis emphasizes a long-term investment approach, advising investors to view any market dips as opportunities to increase their exposure to equities.

"Any declines are likely opportunities to increase exposure to equities. At Axis, we always maintain an asset allocation approach to investing based on investor goals, investment horizon and risk profile with a long term view. Markets remain overvalued across the investment part of the economy and we may see normalisation of valuations in some of these segments. Having said that, India remains one of the fastest growing economies globally. Macros remain strong with an

easing inflation cycle, progress of monsoons and robust economic growth. The upcoming Union Budget in July, the earnings season and policy announcements would set the tone for equities in the near term," Axis Mutual Fund said in a note. 

The fund house expect consumption to pick up going forward and there are little signs of uptick in the rural demand segment.

 Investment Opportunities:

Consumption Growth: A revival in rural demand is anticipated, driven by factors like a good monsoon, lower inflation, and the upcoming festive season. This is expected to fuel growth in consumption-driven sectors. The ongoing trend of consumers favoring premium products is likely to benefit sectors like automobiles, real estate, and high-end retail.

"The housing sector is seeing increasing absorption pan India and with the government’s focus on affordable housing, building materials and ancillaries across the spectrum stand to gain. We retain our overweight stance in these sectors," said Axis MF in its July 2024 note.

Infrastructure & Manufacturing: A potential turnaround in capital expenditure (capex) and renewed government spending are seen as positive signs for infrastructure, manufacturing, utilities, and transportation sectors.

"With the turnaround in capex and a revival in government spending, the entire curve of the capex cycle stands to benefit in light of multiple enablers such as deleveraged corporate balance sheets, healthy profitability, rising domestic demand, and increasing capacity utilization. Accordingly, we are overweight on the infrastructure, manufacturing, utilities and transport," it added.

Government-Backed Sectors: Investors with a preference for holdings aligned with government policies can consider sectors like energy, defense, and power.

Banking & Pharmaceuticals: The banking sector is expected to benefit from factors like low non-performing assets (NPAs), improved capital ratios, and rising credit demand. The pharmaceutical sector is anticipated to see favorable pricing conditions continue.

"The banking sector could gain from decadal low NPAs, better capital ratios and a surge in credit demand. In the pharmaceutical industry, we anticipate the favorable pricing conditions to persist and intensify. Conversely, we have an underweight in the export- oriented segment, attributing this to the decline in global economic growth," it said.

Axis reiterates its commitment to an asset allocation approach that considers individual investor goals, investment horizon, and risk profile. This ensures a long-term perspective for wealth creation.