Indian equity benchmark indices slipped on Friday, snapping a three-day winning streak as investors booked profits in select heavyweight stocks after the markets saw a modest gain post the US Federal Reserve’s rate cut decision on Wednesday.
The market’s earlier gains had been driven by optimism over potential US Federal Reserve rate cuts and progress in trade negotiations between New Delhi and Washington.
However, the Fed rate cut of 25 bps might not be enough to bring the foreign portfolio investors (FPIs) back to the Indian markets, after having withdrawn to the tune of $5 billion in the month of August alone.
“More than the rate cut, the India-US trade deal is going to be a big focus area for FPIs in the short to medium term,” Kranthi Bathini, equity strategist at WealthMills Securities tells Invezz in an interview.
Domestically, Indian stocks have seen a boost with the GST rate rationalisation by the Indian government, which is poised to bring down prices of many goods and services and revive the consumption cycle.
According to Bathini, auto sector is among those poised to benefit the most, and lists Hyundai Motor India (NSE: HYUNDAI) and Mahindra & Mahindra (NSE: M&M) as his top picks.
Despite expensive valuations of the Indian stock market compared to peers in the emerging markets space, Bathini says defence is one sector that still offers good value, and is bullish on the defence sector for long-term investing, forecasting a 15-20% CAGR growth.
Edited excerpts:
Kranthi Bathini, Equity Strategist, WealthMills Securities
US-India trade talks bigger focus area than Fed rate cut for FPIs to come back to India
Invezz: The biggest development right now is the Fed rate cut. Now, FPIs have been pulling out of the Indian market, and their shareholding is at a 15-year low. Will the Fed rate cut bring them back to the Indian market to some extent?
The rate cut definitely makes the FPIs look at the Indian markets.
There is no doubt that a rate cut is always a positive signal for the markets.
But more than the rate cut, FIIs are keenly observing the recent trade tariffs that were imposed on India.
So the US and India trade deal is going to be the big focus area for the FIIs in the medium to short term, more than the Federal Reserve rate cut.
Why the FPI outflows triggered by US tariffs didn’t sink the Indian market
Invezz: So, India and the US are also engaging in trade talks again. We can’t jump the gun at this point, but say, there is some relaxation on the tariff front, you feel like that will have a bigger impact on the FPIs?
Definitely. That would be a greater relief for the economy. And one of the negative factors that impacted the sentiment of Indian markets in the medium to long term was that the tariffs were definitely unprecedented.
Because the Indian economy or India was looking for a most favoured nation status. Three months ago, that was the narrative.
But all of a sudden, the US-India tariffs came as quite a surprise to the markets.
And the kind of statements that came from President Trump were unprecedented and unwarranted for the Indian markets, and that’s where the FPIs felt a little uncomfortable, and in the emerging market space, all of a sudden, India was the least favoured market.
That was the reason in the month of August, if you see, foreign portfolio investors withdrew to the tune of 5 billion dollars.
Normally, 15 to 20 years ago, in a month, a withdrawal of a couple of billion dollars from the markets would have shaken it up, and it would have felt the tremors.
But thanks to the development of the equity market in India, and thanks to the DIIs and the retail investors, who stood like a rock, that helped to absorb slowly the selling by the FPIs and that’s where the Indian market came down below 24,500 level and from there onwards, if you see, the measures taken in the form of GST rationalization has given a push to the market and Nifty was able to withstand 25,000 level, and today at 25,500 level.
Earnings booster could provide a kickstart to Nifty to sustain the 25,750-26,000 range
Invezz: Can you offer any outlook for Nifty in the short term? Or by the end of the year, where do you think it will be?
The Nifty is range-bound right now. Looking at Nifty for the last 18 months, the broader headline indexes are in a consolidation phase.
To break this level at a higher rate, the market needs some more ammunition, some more kickstart.
The kickstart should come in terms of the earnings booster. That’s where the market is lacking in the medium to short term.
And also, whenever Nifty comes around the 25,700 range, the market looks tired in the medium to short term.
So, we need to see the Nifty sustaining the range of 25,750 to 26,000. This is the range Nifty needs to consolidate and sustain.
Otherwise, in the last one year and a half, whenever Nifty comes to this level, we can see some kind of a tangible pressure emerging in the market in the last 18 months.
GST rationalisation to help company earnings, the auto sector to benefit
Invezz: The GST rate rationalisation that has taken place is expected to have a big impact on the consumer-facing sectors like autos, FMCG. Maruti Suzuki announced that they have slashed car prices on some of the entry-level models to pass the rate cut to consumers. FMCG companies are also doing that. So, would these sectors drive corporate earnings in the coming quarters, and what would be your top picks in terms of stocks?
Definitely, the GST rationalisation will help the earnings. And also, it will kick-start the consumption cycle both in terms of the consumer status and discretionary spending.
So, autos are one of the key sectors that are going to benefit because, as far as the Indian auto industry is concerned, this sector has the highest taxation in the world.
It has also been reeling under pressure in the recent past. And the consumption story is expected to kick-start also.
But on a lighter note, people talk too much about FMCG- hair oil, toothpaste, etc., with the GST rates coming down.
That will have some kind of positive effect, but I don’t think that because GST prices have come down, that when you’re brushing two times in a day, you’ll start brushing three or four times a day (laughs).
But it does bring positivity to the sector.
Hyundai Motor India, Mahindra & Mahindra top picks to gain from GST cut upside
Invezz: So, do you recommend any particular stocks which are poised to see a higher upside due to GST rate cuts?
As far as auto is concerned, among the OEMs we like Hyundai Motors and Mahindra & Mahindra- these two will be our top picks in the auto sector.
Invezz: Indian equity valuations have slipped below their historical average but still remain one of the most elevated globally. So, which sectors are overvalued, according to you, and which are the sectors that still offer good value?
I will be more stock specific than sectoral specific.
See, given the kind of long-term growth it promises, Indian markets have been trading at a premium valuation in the emerging markets space.
We had a strong growth projection, and rating agencies like Fitch and S&P have also upgraded India’s sovereign rating, which is quite positive.
So, given the kind of strong growth India offers, we are still seeing an upgradation of earnings, especially in the large-cap stocks.
Bullish on defence stocks – buy on dips to accumulate long-term
But I’m quite bullish about the aerospace sector in India. And I have been bullish on defence for the past 5-6 years, and the defence stocks have witnessed a strong rally in the last 36 months. They have been multibaggers.
Some kind of valuation discomfort does come in defence stocks, but definitely, any dip in defence stocks is a very good opportunity for investors to accumulate long-term.
Still, the defence stocks can give 15-20% CAGR growth. They have a strong order book, and they have strong earnings visibility.
Invezz: What should investors look out for in the third quarter?
The third quarter earnings are crucial because we had the GST reforms, and also the global environment was quite challenging, and the US economy has been reeling under pressure in the medium to short term.
And the tariff wars have been played out throughout the world. These are weighing on the market in the third quarter.
We need to see how the earnings are going to pan out in the third quarter is concerned.
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