Neutral on Indian equities from a 12-month standpoint: Venugopal Garre

Equity returns will be low this year - and perhaps even lower than fixed deposit rates - if one holds positions for 12 months, says Venugopal Garre, MD at Sanford C Bernstein

The markets are trying to find their feet again after a choppy start to calendar 2023. Venugopal Garre, the Singapore-based managing director and senior analyst at investment research and asset management company Sanford C Bernstein, in conversation with Puneet Wadhwa, says he expects a rebound in Indian equities, with the Nifty50 moving to 18,000–18,500 levels this quarter. Edited excerpts:

Where is India on your shopping list?

India’s underperformance of the past six months versus the emerging markets (EMs) should narrow this quarter. Broader EM health is not particularly better than that of India’s, and more importantly, India is still expected to have higher growth in 2023-24 (FY24) relative to most EMs.

While China particularly sounds like one with potential, given the post-Covid reopening benefits, the initial surge and economic benefit are somewhat reflected in how flows have shaped up in the past few months.

While medium-term China and Thailand may see a more positive growth momentum, these aspects may become relevant later in the year. Most EMs outside Asia face challenges of growth and inflation.

What is your exposure to Indian equities right now and what’s the strategy/road ahead for FY24?

We are neutral on Indian equities from a 12-month standpoint as we have a broad expectation of a flat index. However, given weak macroeconomic (macro) data points, high valuations, and rising rates, we were earlier calling for underweight in the first three months of this calendar year.

With rates closer to a peak, macro closer to a bottom, earnings holding up, and valuations having corrected from the peak, we expect a rebound in Indian equities, with the Nifty50 Index moving to an 18,000–18,500 level this quarter. Much of this rebound call is tactical, as we see risks capping the upside.

Is the risk/reward favourable for investing in equities as an asset class in FY24?

Equity returns will be low this year — and perhaps even lower than fixed deposit rates — if one holds positions for 12 months. We expect a lot of volatility within the 12 months; hence, periodic churn and assessment will be required to generate better returns.

However, this makes it more challenging, as there will be limited directional support. Closer to the end of this calendar and the early part of next year, we see room for a larger market catch-up. By then, the macros would have started to improve, global risks would have unravelled, and there will be more clarity on interest rates.

What, according to you, are the key risks that the global financial markets are ignoring as things stand?

We are not in a global financial crisis kind of scenario worldwide, as the global challenges are not consumer-led, and policymakers are acting quickly to contain risks.

We see a different environment where the period of global economy moderation and correction lasts longer. The risk of a protracted downturn is a higher probability outcome, still not the consensus and hence, not priced in.

Similarly, we expect risks to emerge from volatility within that period of slower economic growth. This may manifest in a rebound in commodities such as crude oil prices for short periods due to continued supply-side actions and other geopolitical factors. The additional risk is higher for longer rates, as consensus assumes rates will start to moderate from the end of this year.

When do you see foreign institutional investors (FIIs) turn favourable to Indian equities?

There is room for some reversal in FII flows —some inflows which will be a part of our rebound thesis.

We don’t see material enough inflows to move Nifty beyond the levels of 18,500, although it is not just about a confluence of positives. It is the extent of economic recovery in India and globally that matters.

Is the commodity boom over and can India Inc, therefore, look at a better operational and financial performance in the quarters ahead?

Commodity prices are not just driven by demand-side activities but are also led by geopolitics and supply-side actions. So from that perspective, we continue to see volatility ahead. However, there is less likelihood of a runaway commodity rally in a weak global demand setting.

The US is heading into a recession, and this will help offset the China reopening impact. Chinese policymakers are calling for modest gross domestic product growth, notwithstanding a rebound year, which puts some key drivers for commodity lift to rest. Supply-side actions, however, are tough to gauge, especially in commodities such as crude, where price controls are still managed through cartels.

Which home-grown sectors are you overweight/underweight on?

It is not easy to identify stocks since most are still above the band in terms of valuations. Most calls are hence, relative where one has to assess growth, downside risks, and valuations.

From that perspective, we see financial as attractive; we have a mild overweight on information technology services as a contrarian pick.

Among smaller sectors, we have an overweight on cement, real estate, and consumer appliances.

We are underweight on consumer discretionary (excluding automotive), consumer staples, commodities, industrial, and utilities.