'Lok Sabha election results priced in': Mirae Asset's Gaurav Misra on trends to track

In the dynamic landscape of fiscal year 2024, marked by both domestic and global shifts, notable trends have emerged that will shape investor sentiment and market dynamics. Business Today connected with Gaurav Misra, Head – Equity, Mirae Asset Investment Managers (India), who reflected FY24's highlights and throws light on the trajectory for upcoming fiscal year.

Misra says India's economic resilience and infrastructure growth have bolstered investor confidence, while surprising equity returns signal underlying market shifts. Looking ahead, Misra foresees a more subdued market, underpinned by ongoing economic strength and sectoral upcycles, despite impending challenges such as fiscal consolidation and consumption slowdowns.

He said that the results of general elections 2024 are already priced in the market and select sectors are earmarked for potential outperformance. 

However, caution is advised amidst valuation concerns and market volatility, with a prudent asset allocation strategy recommended for medium-risk investors. 

Edited excerpts:
 
BT: 2024 appears to be an eventful year at macro-level on both domestic and global levels. What are your key takeaways from FY24 and what is your outlook for the upcoming fiscal year? How is it expected to pan out for equity investors?

Misra: In FY24, the strength and stability of the Indian system was clearly something which met expectations as also the buoyancy in the infrastructure/investment part of the economy. Also,  as expected, corporate earnings were driven by margin expansion - a normalization from the war afflicted FY23 base. On the other hand, what surprised me was the returns from equities, especially the magnitude of rerating across many segments of the market. After a very strong FY24 the upcoming year could give more modest returns. The upcoming year will have the support of the ongoing economic strength.  Specifically upcycles in sectors such as real estate, asset quality /credit growth and a possible uptick in private capex as well. All this will be aided by a stable domestic macro with range-bound inflation and an improving interest rate environment. However,  in FY25 we will have to navigate the drag impact of a contractionary fiscal impulse on account of the fiscal consolidation being undertaken by the central government, challenges of the ongoing sluggish growth in consumption and the lack of margin tailwind for corporate earnings. We will also have to keep an eye on any global/western slowdown - lag effect of the high interest rate regime and geo political blow outs.  

BT: Based on the performance of current fiscal, which sectors surprised you through their outperformance or underperformers. What is your view on the current market volatility ahead of some big events like general elections 2024 and rate cuts?

Misra: The magnitude of rerating in PSU stocks across different industries and in some other sectors was clearly a surprise as was the sluggishness in consumer demand in many industries. India’s macro stability is now taken as a given and this is really on an improving path. Thus, even if global vulnerability were to arise India should hold up better.  Moreover, volatility is an inherent part of the market and I do not equate it with risk. Risk for investors would be any permanent loss of capital. This is taken care of through a correct investment approach. In my view domestic electoral outcomes are already built into market expectation post the outcome of the November state elections. However, easing domestic monetary cycles and rate cuts could be supportive for some parts of the market even from the current levels.

BT: Which sectors do you see outperforming in the next fiscal? Where should investors park their money?

Misra: I expect financial services led by the private banks to do well amongst larger sectors and for investors they could play this through a BFS thematic fund. I think smaller sectors such as telecom, specialty/agri chemicals, home improvement could also do well. For others like IT the outlook will become clearer as the months progress. Otherwise given the backdrop of high starting valuations I think we will see more of a bottom-up driven market. While core allocations to equity should remain intact in the coming year, if there are deviations from an optimum asset allocation that should be rebalanced out on a periodic basis. For investors with a long horizon a multicap/flexicap will be an appropriate category to invest in and for investors who want to toggle between market caps for themselves than a combination of large and mid would be appropriate for the next year.

BT: Valuations concerns have been there for quite sometime now, following the steep rally in the market across all segments. Is it time to be cautious or do you see the momentum continuing in the market? Can largecaps may catch up to their smaller peers in terms of performance?

Misra: I would tend to proceed cautiously while one can, if comfortable and confident, try to ride the momentum as well. The nature of systems such as the stock market is that you can get to extreme situations (either way) in select sectors/market caps. I will like to proceed cautiously keeping in mind the business models and valuations notwithstanding robust domestic macros and fairly supportive cycles. In aggregate, at this moment,  I believe there are more firms in the large cap which offer a better value proposition than in the smaller capitalization bunch. Additionally, the earning growth outlook for the large cap category is holding up better than for the small cap and even valuations are more attractive on absolute and relative basis for the large cap. Eventually, in the long run markets will behave as weighing machines, rewarding economic value addition by firms, while in the short run they do behave as voting machines, driven by flows and emotions.

BT: Broader markets have been taking a beating lately after a sharp performance in the last few months. Do you see microcaps, smallcaps, and midcaps continuing this performance or is it time to take your money off the table from these pockets? Even the regulators have been cautioning over the euphoria in this space. What is your view on it?

Misra: Undoubtedly there has been a surge in some cohorts of the markets. I completely agree with the regulator's stance on this matter.  These excesses can play out in many ways. For investors with a long-term horizon, I would suggest a flexible exposure through a flexi or Multicap fund. In the near term if one is over exposed to the small/microcap then a realignment would be helpful.   My view is that in the long run value creating firms will be found across market capitalizations. There are firms and industries which are more appropriately represented in different regulatory defined market capitalizations. Good and leading firms in smaller industries will not make it to the large cap index and similarly, good and leading firms in large industries will be found in the large cap index and not in the small cap. Thus, judicious stock selection across market capitalizations would be an effective way to participate in the opportunity.

 
BT: What are the key events and factors other than elections and rate cuts, that can impact the performance of equity markets in the coming period? What should be an investment strategy for an investor with a medium risk appetite for a medium to long term. How can one ride through this volatility?

Misra: Unintended consequences of the high global rate environment could have a bearing on equity markets beyond the goldilocks assumption of the moment. As we go forward, we will start hearing more on the evolution, use cases and commercialization of assorted tech and AI led business models. Some of this could have a bearing on the markets. The unfolding cost and price dynamics in the RE power universe could also alter the current projections in some pockets of the market.  As we have seen in recent years, there are always chances of surprises or shocks hitting the markets. Rather than trying to predict wherefrom such an unknown unknown event could come from, a better approach would be to prepare through appropriate asset allocation. In my view, even for an investor with a medium risk/term horizon having an optimum asset allocation strategy which is periodically reviewed and realigned is the best way to ride through volatility. Having said that, I also believe in the structural opportunity India presents. This can be best captured over the long term through the power of compounding and equity is the best asset class to do that.