Worried about geopolitical tensions? Harshad Borawake of Mirae Asset tells how to make money in this market

Despite the ongoing geopolitical tensions, benchmark equity indices in the country are hovering at their record-high levels. Of late, the BSE Sensex soared to the 82,000-mark, while the NSE Nifty hit the 25,000-mark for the first time. These record levels reflect the confidence of the investor community in India.

Business Today caught up with Harshad Borawake, Head of Research and Fund Manager, Mirae Asset Investment Managers (India) to under what lies ahead for the markets and what strategy investors should adopt to make money on D-Street.

The market watcher said that after a sharp fall during the Covid-19 pandemic, India’s markets witnessed a robust recovery, driven by increased economic activity and earnings. With the elections behind us and a stable economic backdrop, the focus is shifting back to earnings growth and valuations.

“Over the short term, there is a mismatch between the expected earnings growth and prevailing valuations. Typically, being a festive season, the second half of Indian financials is better from the domestic demand perspective. Hence, barring any black swan event, till the earnings catch up and increasing expectation of rate cuts with moderating inflation markets could remain sideways in the near term,” Borawake said.

Meanwhile, the midcap and small-cap segments have delivered robust returns to investors in the recent past, but Borawake advised caution.

“Over the last one year, mid-cap and small-cap segments have run up significantly in the recent past. In this context, mid and small caps indices valuations’ are trading meaningfully above long-term averages, while the large-cap index is trading near long-term averages,” he said.

Borawake added that as long as the earnings momentum is sustained, there may not be any sharp correction. There are pockets of excesses in some sectors like industrials, which might see correction. The focus should shift to more bottom-up and stock-specific selection.  

Turning to valuations, the Nifty 50 Index is trading at around 22x FY25 and 19.2x FY26, which Borawake considers reasonable, given a projected earnings growth of approximately 17% CAGR from FY23 to FY26.

He highlighted the importance of the growth of quality. Unlike in the early 2000s, Indian companies today are not just showing strong profit growth but are also generating substantial free cash flows. This is particularly noteworthy in a global environment where growth is scarce. Coupled with higher equity allocation in household savings, India stands out for its robust and consistent earnings performance.

Looking ahead, Borawake added that the markets often react to short-term factors but are ultimately driven by long-term earnings trends. Equity markets are poised to benefit from a sustained focus on fiscal consolidation and capital expenditure.

“The key factor to drive markets going ahead is likely to be earnings. Eventually, equities are about growth and it needs to sustain for the current valuations to be justified. Hence, that is likely to be the most important variable driving markets going ahead,” he said, adding, markets act like a voting machine in the near term, but over the longer term it is a weighing machine as markets are slaves to corporate earnings.

While sharing the list of potential risks for the market, he said that global uncertainties, potential oil price spikes, and sudden shifts in commodity prices could create turbulence. Domestically, factors such as monsoon progress and political developments could also impact market sentiment. Abrupt moves by global central banks might introduce temporary volatility. Yet, with India’s favourable growth outlook compared to other markets, these risks could be viewed as opportunities, provided corporate earnings remain strong.

“Given that India’s growth and macro are better than other investible countries, as long as the domestic corporate earnings growth continues, materialisation of any of these risks can be seen as a buying opportunity,” Borawake added.

Post-Budget, certain sectors are emerging as attractive investment opportunities. The focus on fiscal consolidation and rural development will benefit the financial and consumer sectors.

“We are overweight in private banks, pharma, consumer discretionary, telecom, etc.  However, the time to focus more on a bottom-up approach and allocate more towards the stocks wherever the risk-reward is in favour,” he said.