Expert view: Joseph Thomas, the head of research at Emkay Wealth Management, is positive about the Indian stock market due to India’s healthy economic growth outlook, low interest rates, and income tax and GST reforms. In an interview with Mint, Thomas shared his outlook on the Indian stock market for Samvat 2082, FIIs, and equity investment strategy. Here are edited excerpts of the interview:
What led to the poor performance of the Indian stock market in Samvat 2081?
The performance of the domestic equity markets has been influenced to a large extent by exogenous factors and much less by endogenous factors.
The developments around the Russia-Ukraine conflict, the Middle East conflict, and the tariff war have all been factors which have affected the markets.
In addition to this, we have seen the GDP growth gradually declining in the latter part of the year.
The earnings have also been a mixed bag quarter after quarter. It looks like the earnings decline has bottomed out, and we may be able to see a pickup over the next two quarters.
What is your outlook for the Indian stock market for Samvat 2082? What are the key headwinds and tailwinds?
The fundamentals support a good economy and good markets. The GDP growth, which is expected to be somewhere between 6.50% to 7% for the current year, is one of the strongest growth stories among the major economies of the world.
Further, we have a low-interest rate regime and plenty of liquidity in the system, which will also support growth and investments.
The huge public capex of close to ₹11 lakh crore, the tax concessions given to smaller taxpayers to the tune of ₹2 lakh crore, and the recent GST rate reductions are all expected to have a positive impact on consumption and investment in the medium to long term.
Reduction in GST rates alone would lead to a multiplier effect on consumption spending. The fruits of all this will be visible over the next two quarters.
The government finances are in good health, and the trajectory of inflation is quite muted, which is fundamentally affecting the economy and the markets.
The impact of the tariffs, if they remain at the 50% level for some more time, will be adverse to our trade and business. If it continues at such a high level, it may pull down the GDP growth by about 0.50%, and in that eventuality, the RBI may move into an accommodative phase of the policy to support growth.
However, with a trade treaty being negotiated with the US, the general expectation is that the tariffs will finally settle down at much lower levels compared to the current levels.
What are the key sectors that will generate alpha in the next one year?
With fiscal and monetary policy being growth supportive, the key sectors that may do well are financials and consumer discretionary.
However, we suggest not focusing too much on sectoral tactical allocations, as there are multiple potential tailwinds for other sectors as well. The tactical allocations can be more broad-based and thematic in nature, such as PSU stocks and Infrastructure.
Why are FIIs so negative on the Indian market? What can make India an attractive destination for FIIs?
The FIIs have been exiting the domestic markets, and that too from the large caps. The US interest rates have been high, and after a hike of almost 5%, the cut in the base rate that has been effected so far is 1.25%.
Therefore, interest rates have been quite high in the US, and the currency yield of the US Dollar has also remained high.
With further rate cuts likely to take place due to the emerging challenges to economic growth in the US, post the tariff changes, and as interest rates move down, money, which generally chases high-risk, high-return investments in emerging markets, will move out of the shores of the US, and this may help India too get a fair share of the inflows.
The currency levels with a weak rupee may also be attractive for non-rupee-based investors.
Consistent economic growth and earnings growth, stable polity and government finances, and a stable currency are factors that give comfort to overseas investors.
How do you see the recent reforms by the government and the RBI’s monetary policy? Do you think they can provide a lasting boost to consumption?
As mentioned earlier, the rationalisation of GST rates and the rebates offered to small taxpayers in the budget are measures that directly boost consumption and investment.
We will see the positive effects of all this over the next three to six months. The impact on consumption is a multiplier of the revenues forgone, and the multiplier works through different layers of time, and the actual impact is transmitted over long time periods.
Therefore, the benefits granted so far will have an enduring impact on consumption. The RBI monetary policy is in a neutral mode now, and in case of any adverse impact on economic growth, the RBI may consider a cut in the repo rate.
It is too early to gauge the impact of the high tariffs on growth at this juncture. RBI is also awaiting to see the full transmission of the rate cuts effected so far before any further action on the rate front.
We can expect supportive fiscal and monetary policies in the coming months as we navigate difficult waters.
It appears retail investors have started looking at overseas markets also for investment. Considering the US market’s record run this year, do you think it is the right time to invest in the US market?
Investors have been looking at overseas markets for a long time now, since the emergence of fund of funds investing through feeder funds in overseas markets, especially in the US market.
Europe, Japan and China look much cheaper buys in terms of valuations compared to the US.
The US tech is attracting more attention, and the NASDAQ valuations have gone up to 38 P/E. The US being the largest economy, and the potential for tech to do well over longer time periods, provides merit to the investment.
Europe may also provide much better results this time around compared to the last few years, as the defence spending is going to rise the most in the EU countries from the current 2% to 6%, which is expected to be hiked in the coming one year.
How should an ideal portfolio look? What should be the mix of large, mid and small-caps and other asset classes?
In a portfolio allocation, at this juncture, a significant allocation, somewhere between 50% to 70%, should be set apart for mid-caps and small caps through managed funds.
These managed funds from the mutual funds space or from portfolio management schemes or alternative funds should be well-managed and should have a consistent track record of performance.
Mid and small caps are likely to do better in terms of business earnings, and therefore, the same will get reflected in their prices. It is also important to note that these stocks have much larger market capitalizations today compared to what it was a few years back. There is a good amount of liquidity moving into these stocks. The expanded market capitalizations would provide opportunities to put through larger investments in these stocks. Exposure to large caps could be taken through large cap funds, or large and mid-cap funds which have both large caps and midcaps in the portfolio. There are many interesting products which provide exposure exclusively to carefully selected mid and small cap stocks both in PMS and cat III AIF formats.
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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.