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Despite global uncertainties, India remains an attractive investment destination due to its ongoing political stability and potential for continued economic growth. All three elements of the capex cycle (housing, corporate capex, and government capex) are currently active, which may mitigate the impact of a potential global slowdown, said Mirae Asset Mutual Fund in a note.
Analysts expect the Nifty earnings to maintain a mid-teen growth rate over the medium term due to rising corporate spending and strong bank balance sheets. Compared to other emerging markets, India offers a more robust and consistent earnings environment.
"For India, all the three elements of the capex cycle (Housing, Corporate Capex & Govt Capex) are now firing and hence the potential global slowdown should have limited impact on India. Over the medium term, we continue to remain constructive on equities and believe India is on the cusp of achieving robust growth over the next few years," said analysts at the mutual fund.
The IMD (India Meteorological Department) predicts a 6% above-normal monsoon season in 2024, thanks to the weakening El Nino effect and the emergence of La Nina. This, coupled with moderating inflation, could lead to a broad-based recovery in consumption demand, they added.
April 2024 offered a mixed picture for the Indian stock market. The benchmark Nifty 50 index rose 1.2%, marking its third consecutive month of gains. However, concerns about global factors like potential rate cuts by the US Federal Reserve and ongoing geopolitical tensions kept investors on edge.
The Nifty Midcap 150 and Nifty Smallcap 50 indices rebounded from March's sell-off, surging 6.3% and 11.4% respectively. Sector-wise, most indices finished positive, led by Metals (10.8%), Power (7.7%), and Realty (7.5%). The IT sector was the only major loser, dropping 4.3%.
Mid/Small Cap vs. Large Cap Performance:
Outperformance: Over the past year, mid-cap and small-cap indices have significantly outperformed the Nifty 50 (large-cap index) by 30% and 40% respectively.
Reasons for Outperformance:
Fund Flows: This could be due to a surge in investments specifically targeting mid/small cap companies. These funds might be experiencing high inflows, pushing up the prices of those stocks.
Large Cap Outflows: Conversely, large-cap stocks might be witnessing investor outflows, potentially driven by a lack of confidence or a search for higher returns elsewhere.
Valuation Impact:
Mid/Small Cap Premium: As a result of the higher demand for mid/small cap stocks, their valuations are currently trading at a premium compared to large caps. This means you're paying more per unit of their earnings potential.
Reasonable Large Cap Valuation: The Nifty 50, on the other hand, is considered reasonably valued at around 18 times its projected FY26 earnings. This suggests large caps might offer better value for money right now.
Recommendation: Investors should invest based on their risk profile and continue allocating via SIP(Systematic Investment Plan).
Large Cap Focus: The report recommends focusing on large-cap oriented funds. These funds primarily invest in established, large companies like those in the Nifty 50.
Diversification: They suggest diversification through various fund types like large-cap, flexi-cap (invests across market caps), and multi-cap (invests in a mix of large, mid, and small caps) funds.
Hybrid Funds: Including hybrid funds (invest in a mix of stocks and bonds) in your core portfolio can offer some stability.
Thematic Funds: For those with a specific investment theme, they recommend considering consumption funds (expecting a rise in consumer spending) and BFSI funds (banking and financial services) that offer a good balance of risk and potential reward.
"We prefer large-cap oriented funds and hence any fresh allocations can be made in diversified funds like large cap, Flexi cap and Multicap. Hybrid funds, given their flexibility in asset allocation can also be made part of core portfolio. In thematic funds can prefer consumption fund for expected mass consumption recovery and BFSI(banking and financial services fund) fund given the decent risk-reward," it said in a note.
