'Tax relief for the middle class will be a big positive for the markets'

Nifty is comfortably trading at 15-year average PE of 19.2x. As long as valuations are not frothy in large caps, there's not much to worry about, said Siddharth Vora of Prabhudas Lilladher

All eyes are now on the budget proposals that are likely to show the policy intent of the newly formed central government. SIDDHARTH VORA, head of quant investment strategy and fund manager at Prabhudas Lilladher Asset Management, tells Nikita Vashisht in an email interview that as there is no major systemic risk visible for Indian equities in the near-term, investors should shift focus from momentum to value and quality. Edited excerpts:

After the post-election consolidation, do you expect a pre-Budget market rally in July?

Like every budget, this time, too, there is chatter around tinkering with the long-term capital gains (LTCG) tax. Investors may not want to jump into the markets at this time until there is clarity on this front. Moreover, there are expectations of some populist measures, which could impact the fiscal deficit. All these factors need to be assessed, and smart money will be on the sidelines until then. Thus, I expect the markets to be range-bound ahead of the upcoming Budget session. However, looking ahead to the entirety of FY25, the outlook appears promising with policy continuity, political stability, and continued government capex on infrastructure expected to bolster the economy.

 

As regards the budget, what may play a spoilsport from a policy perspective?

Firstly, all eyes will be on the capital expenditure. In the interim budget announced in February 2024, Finance Minister Nirmala Sitharaman announced an 11.1 per cent increase in the capital expenditure outlay for FY25 to Rs 11.11 trillion, amounting to 3.4 per cent of the gross domestic product (GDP). We hope this figure remains unchanged.

That apart, expanding the scope of Atmanirbhar Bharat, Vande Bharat, and Maritime Amrit Kaal Vision will bode well for defence, infra, railways, and shipping companies. It is also crucial to allocate funds for new initiatives such as green energy and electric vehicles (EVs). These are the sectors of tomorrow and the stocks are commanding a premium based on the immense growth potential.

I also anticipate an augmented outlay for rural development and initiatives aimed at the lower strata of society. Expectations include higher subsidies and increased allocations for agricultural modernisation, along with potential revisions to the Minimum Support Price (MSP) policy and MGNREGA payments. The GST Council has already suggested lowering GST rates on fertilizers to aid farmers. More such measures are expected to boost rural incomes.

Additionally, any relief in taxation for the middle class will be a big positive for the markets. That said, announcement of too many populist measures may impact India's fiscal prudence, which will be a big negative.

How should investors adjust their portfolios ahead of the budget?

Currently, our quant model indicates the highest sectoral allocation to industrials. Industrial companies have been reporting strong revenue growth driven by a robust order book and margin improvements due to operating leverage and normalised raw material prices. Many industrial companies have significantly exceeded consensus earnings estimates. Given the expectations of continued infrastructure spending, investors may consider to be 'overweight' on industrials.

Portfolios should also lean towards large-caps as foreign institutional investors (FIIs) are expected to return in force post-Budget once they gain clarity on India's fiscal situation. As there is no major systemic risk visible for Indian equities in the near-term, investors should shift focus from momentum to value and quality.

What are your overweight and underweight sectors in the current market?

In our flagship quant fund AQUA, our largest allocations continue to be autos and industrials. Many auto companies have been reporting increase in average selling prices (ASP), making strides in EV and planning new launches. This is also good news for auto ancillaries as their order books are increasing. To manage portfolio risk and build stability while benefiting from any populist measures, discretionary consumption focused plays are making a new entry in our portfolio with almost 20 per cent weightage.

We have also added consumer and healthcare as a tactical defensive layer to reduce portfolio beta as we shift focus from returns alone to risk-adjusted returns. Balancing cyclical (auto, realty, industrials) and secular (consumer and healthcare) growth sectors is creating resilience in the portfolio and reducing beta. Meanwhile, we continue to remain underweight on information technology (IT) stocks as demand recovery has been slow in Western markets and Indian IT services companies derive 30-40 per cent revenue from the US and Europe.

How comfortable are you with the overall market valuation?

Nifty is comfortably trading at 15-year average price-earnings (PE) of 19.2x. As long as valuations are not frothy in large caps, there’s not much to worry about. Budget is expected to be progressive and that will give a further fillip to markets. Investors should remain invested, with bias towards quality and low volatility stocks. It is time to balance risk and reward instead of focusing on just returns.

To what extent are the rate cuts priced in?

When it comes to interest rate cuts, even as inflation has eased in the US, the Fed does not want to loosen policy yet. We had begun the year with the expectation of three rate cuts, and markets globally had priced that in. However, markets now seem reconciled to lesser rate cuts and volatility in inflation and growth.

What are your expectations from the upcoming earnings season?

We anticipate strong performance from sectors such as auto, capital goods, pharma, cement, and travel & tourism. Key areas to watch include the trend in raw material prices for consumer companies, the trajectory of order books for defence and railway companies, and management commentary from IT firms.

A MF house recently launched an EV-based fund. Do you see more 'futuristic' / thematic funds coming up? What could be the potential areas?

The NSE has introduced two interesting indices in the recent past: EV index and the travel and tourism index. Both these sectors are growing rapidly and reflects that India’s capital markets ecosystem has started recognising the potential. Going ahead, we can see indices and ETFs focused on green energy, fintech and AI as new companies mature or existing companies build new verticals to represent these.

What’s an ideal portfolio mix for investors right now?

After assessing risk, valuations, macro, sentiment, trend and monetary cycle indicators, our quant model suggests an allocation of 75 per cent equity, 15 per cent gold and 10 per cent to debt in the current market. Equity allocation at 75 per cent helps balance risk and returns, as frothy valuation in broader markets calls for some caution. However, expected rate cuts, robust macro and stable risk appetite still keep us positively biased towards equities.