Where to invest? Despite uncertainty, Kotak bullish on large-caps and long-duration funds

Brokerage Kotak Institutional Equities prefers a focus on large-cap stocks due to their lower volatility compared to mid and small-caps, especially in the near term. The Nifty is expected to trade around a P/E ratio of 20, potentially delivering high single-digit returns in the next year. The brokerage also recommends adding exposure to longer-duration bonds with a near-term 10-year bond yield expectation of between 7.0% to 7.1%. Investors can use any temporary rise in yields as an opportunity to increase their investment in longer-term bonds, it said.

Kotak recommends remaining positive on interest rate-sensitive and domestically focused sectors like Real Estate, Banks, NBFCs (Non-Banking Financial Companies), and PSUs (Public Sector Undertakings). It suggests avoiding FMCG (Fast Moving Consumer Goods) and paint companies due to potential increased competition within these sectors. Within the export sector, the brokerage favours the pharma sector over IT.

 

Market Performance:

The Nifty 50 index, a benchmark for large-cap stocks in India, gained 1.2% in February. However, it lagged behind global indices like MSCI World (4.1% gain) and MSCI Emerging Markets (3.2% gain).

Mid-cap and small-cap stocks underperformed, ending the month in negative territory.

Nifty underperforms MSCI EM and MSCI world as Chinese market recovers from bottom

Positive Signs:

1. There was a positive inflow of foreign funds (FPIs) into Indian equities amounting to Rs 15.4 billion.
2. Strong corporate earnings growth was observed, with Nifty 50 companies reporting a 13.8 per cent year-on-year increase in net profit.

"India's growth recovery and resilience are now reflected in the Nifty's 12-month forward valuation of 20.3x and the INR's remarkable resilience, marked by the lowest volatility in several decades. We continue to expect the Nifty to trade around a 20x 12-month forward PE ratio. With a March 2026 EPS of INR 1,200, we continue to expect high single-digit returns for the Nifty Index in the current year. While domestic liquidity might support mid and small-caps, we believe the near-term risk-reward is more favorable for large-caps given their lower volatility. The Nifty Midcap 100 currently trades at a 12-month forward rolling PE of 26.2," the brokerage said in a note. 

Equity strategy - A Snapshot

Neutral on Equities with focus on large cap

Benchmark, Factor Indices & Sectoral Performance

Global Context:

Global bond markets experienced volatility due to economic data fluctuations in the US. The US Fed rate cuts are now anticipated to be delayed.

Domestic Market Advantage:

1. The Indian bond market remained relatively stable compared to the global market, with policy rates likely to have peaked.
2. Kotak expects potential rate cuts in India to begin only in Q3FY25. However, it highlights that bond yields might adjust in anticipation of future events, as seen in previous rate cut cycles.

Investment Strategies for different time horizons: 

1. Up to 1 year: Invest in arbitrage funds, ultra short-term/money market funds.
2. 1-3 years: Consider active funds like short-term funds, banking & PSU funds, corporate bond funds, or target maturity funds.
3. 3+ years: Invest in duration-focused products through mutual funds during yield spikes. Explore Selective Equity Savings Funds or conservative Multi Asset Funds as alternative options.

Overall, the Kotak report suggests that despite some global uncertainty, the Indian stock market offers potential opportunities, particularly in large-cap stocks and longer-duration bonds. 

Disclosure: Entities controlled by the Kotak family have a significant holding in Business Standard Pvt Ltd