The government has enough fiscal room to deliver a positive Budget, says RAHUL SINGH, chief investment officer-equities at Tata Asset Management. In an interview with Khushboo Tiwari, Singh notes that, barring a few sectors, markets have reached valuations that require bullish assumptions to justify. Edited excerpts:
What are your expectations from the Budget?
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The government’s discipline towards fiscal targets will continue to be a central theme. Another recurring theme, seen over the last three Budgets, is the focus on capital spending on infrastructure. I see no dilution in that.
Given the cushion of robust tax revenue growth and a higher-than-expected dividend from the Reserve Bank of India (RBI), the government may also have room to boost consumption spending.
We might see a balanced approach this time, maintaining the focus on capital spending while also trying to boost consumption or rural spending in some way. The government’s increased fiscal room might be used to support consumption.
Which sectors do you see rallying next?
We believe banking is ‘moderately priced’ because the overall market has reached valuations where bullish assumptions are necessary to justify them. For banking, pharmaceutical, healthcare, and even information technology, to some extent, we don’t need such assumptions.
This is also generally true for largecap versus small and midcap (SMID) stocks. Largecaps have a better risk/reward profile, and we don’t need to stretch our financial forecasts to justify their valuations.
Which areas are currently overvalued?
There are five or six sectors where markets have performed well because the fundamentals support them, but now their valuations are much higher than can be justified. These include defence, manufacturing, certain parts of capital goods, and industrials.
How should investors approach the smallcap space?
If SMID stocks represent over 50-60 per cent of your asset allocation, it might be time to reconsider and reduce that proportion. If they make up 40 per cent of your assets, it’s not a concern, as the economy is doing well and the investment cycle is reviving.
The SMID segment offers more opportunities in today’s economy, and you should have a healthy proportion in your asset allocation. However, smallcap allocations have often exceeded this proportion, so investors need to be mindful of the risks.
While pockets of the economy favour SMIDs, their valuations have reached a premium over largecaps, necessitating some risk management.
Equity mutual funds continue to mobilise sharp inflows. Are there enough deployment opportunities, or is there a case to increase cash levels?
Liquidity can become a concern in SMIDs, where excess liquidity is chasing fewer ideas. This problem is not there in largecaps.
We hope that in the next six to 12 months, some balance will be restored in terms of largecap performance versus SMIDs, which will naturally influence the current inflows tilted towards SMIDs.
What are your expectations for earnings growth in 2024-25/2025-26?
For this year, our earnings expectation for Nifty is 12-13 per cent, and for the next year, it is 15-16 per cent. Even if valuations were to reduce from current levels and returns did not align with the earnings growth rate, we could still see double-digit returns at the Nifty level.
One should approach the markets with the understanding that the Budget’s impact typically lasts only one or two weeks, after which earnings need to line up with forecasts.
What are the key risks going forward?
One needs to recognise the risks that come along with very high valuations. Investors often ignore these risks when returns have been good, but this is precisely the time to pay more attention. Corrections are unpredictable, but risks remain.
Geopolitical risks persist, and interest rates may not be cut immediately, as the RBI has indicated. Economic growth and spending, particularly in rural areas, are not picking up, posing a risk to earnings.
The initial public offering (IPO) pipeline has swelled. Do you see the right valuations and opportunities in the primary market?
The primary markets are doing well, with distinct variations in the quality of companies. Valuations are on the higher side, aligned with market movements. However, there are sufficient checks and balances to prevent excessive participation in overly expensive IPOs.
Near the end of a bull market or during bubbles, the balance often disappears, and poor-quality IPOs can slip through. Currently, we do not see this happening. The market is not in a state of complete euphoria.