Flows will chase relative growth outperformance in FY24: Rahul Arora

The US Federal Reserve (Fed) and the Reserve Bank of India (RBI) should hike once more by about 25 basis points each, says Rahul Arora CEO-institutional equities at Nirmal Bang

As markets enter 2023-24 (FY24), Rahul Arora, chief executive officer-institutional equities at Nirmal Bang, in conversation with Puneet Wadhwa, says the government’s move to tinker with Finance Bill, 2023, at the tail end of 2022-23 was a touch discomforting. But the markets have absorbed the development and moved on. Edited excerpts:

Are markets too pessimistic about the macroeconomic situation?

There is not much reason to be overly pessimistic about rate hikes and inflation incrementally from here on. The US Federal Reserve (Fed) and the Reserve Bank of India (RBI) should hike once more by about 25 basis points each. Inflation in India is likely to moderate to 5 per cent for FY24.

Given the pace of interest rate hikes that have happened over the past 12-15 months, the probability of a US recession is reasonably high but likely to be short and shallow.

While it is always difficult to time stock-buying, one could maybe wait for the next round of earnings before taking a definitive call. We could potentially get better prices then.

Has the government’s tinkering with the Finance Bill provisions soured investor sentiment as regards taxation policy stability?

The move in itself was a touch discomforting from a market perspective, but I think the market has absorbed it and moved on. We do not think this has in aggregate soured the mood around taxation policies in India. We certainly do not think this will have a material aggregate bearing on flows into the equity capital market (ECM).

The situation would have been somewhat different had this been applied to long-term capital gains tax for ECM. This is not a retrospective move but a prospective one.

Will local flows hold up and foreign portfolio investors (FPIs) return?

Flows will chase relative growth outperformance in FY24, and we think India will stand out basis of that. Local flows should hold up. Systematic investment plan numbers have been strong and encouraging in an otherwise relatively listless market. Equities still seem to be the preferred choice for investors, although late some have been looking at some allocation to assets like gold. Broadly, we see domestic flows holding up alright. 

FPIs should come back in a material way towards the last quarter of FY24 once the Fed starts sounding incrementally more dovish, or perhaps even cutting rates. The next six to nine months can be challenging from an FPI flow perspective, as we are looking at risk aversion in the face of an impending US recession or a material slowdown.

Where do you think the leadership will emerge from in case the markets stage a recovery?
 

Predominantly, the leadership will have to come from the banking, financial services and insurance sector, given its dominant share of the index. Information technology (IT) could make a comeback towards the end of the calendar year, although the next six to nine months could be challenging for the sector.

If we do end up having a decent monsoon and increased government spending after that in the run-up to the elections, the interest could return to the consumer sector as well.

Are rising Covid and flu cases in India a non-event for the markets?

Unless this blows up into substantial numbers wherein we start looking at restrictions on physical movement, on present-day evidence this seems a non-event for markets.

Can subpar corporate earnings over the next few quarters play spoilsport?

Yes. For the past decade or so, the sell-side always seems to overestimate earnings in its zeal to justify valuations at the start of every financial year, only to consistently revise them lower as the year progresses. This year, too, is no different. Currently, the projections are for 18 per cent profit growth. I would be pleasantly surprised if that came through. 

Any silver lining here?

From a margin perspective, however, the worst is behind us. Crude oil and other commodities — by and large — are far more comfortably placed today than they were a year ago, or around the time the Russia-Ukraine war began.

In addition, higher rates could trigger a broader slowdown in retail credit growth, particularly for real estate and automotive. The incremental delta on the top-line growth on aggregate is also being overestimated at this point in time.

In terms of positive triggers, a good monsoon, a follow-through on increased government spending, and a reversal in stance by the Fed and the RBI will aid positive sentiment incrementally.

Which sectors are you overweight/underweight on?

We are overweight on cement, road construction, pharmaceutical, commercial vehicle, and gas stocks, and selectively on banking, agrochemical, and consumer discretionary.

Our major underweight is IT. There is a case to be made for some specialty chemical names that have seen good time and price corrections.

Some quick-service restaurants and hospitality stocks could have a good FY24 as well.