Expert View: Indian Stock Market Could Rise Significantly After Correction, Says Dhiraj Relli of HDFC Securities

Expert opinion on Indian stock market: Dhiraj RelliManaging Director and CEO of HDFC Securitiesbelieves that the Indian stock market may not be far from its peak. However, given the inherent strengths of the domestic market, it could aim much higher after a correction. In an interview with Mint, Relli says that investors need to balance their allocation across large-cap, mid-cap and small-cap stocks and correct the excess.

Edited excerpts:

How do you assess the current market structure? What is your short-term and medium-term outlook for Nifty 50?

Markets continued to climb the wall of worries, aided by flows — mostly local. Technical factors like impending F&O restrictions have not had much of an impact on indices’ trends so far.

The negative impact of the election result or budget legislation was also quickly overcome. Q1 corporate results did not surprise positively in any significant way.

In our view, macroeconomic stability and hopes for continued strong growth, aided by normal monsoons this year, could be key factors driving the current rally in the markets.

In addition, local investors (including those who came in after the COVID-19 pandemic) have made significant money (or recorded MTM gains) in the markets, which encourages them to raise more funds or capitalize on dips.

Savings equivalence has reduced dependence on foreign capital inflows and brought stability to our markets.

The fact that Nifty has not seen any significant correction since the lows of June 2022-March 2023 increases the risk of a correction in the next few months.

Global markets are also behaving similarly. The flow of money caused by QE from G4 central banks from 2008-2009 and later during Covid times (from $4.4 trillion in September 2008 to $15.17 trillion in February 2020 to $26.38 trillion in February 2022) has caused asset class value inflation.

The withdrawal of liquidity (to $19.98 trillion in July 2024) was slower, hence the positive impact of the liquidity injection is still strong.

The expectation that the US Federal Reserve will cut interest rates in September could further boost values, as stock valuations could rise in a falling interest rate scenario (although past correlations appear to be off at this point).

However, one should be aware of the possibility of buying based on expectations and selling based on recurring information in the markets.

The Nifty rally seems limited and slow; however, one has to decide on an individual basis whether one wants to continue investing till the markets start turning around or start taking profits and miss out on the remaining gain.

Mid and small cap segments are growing despite valuation concerns. What should our strategy be for these pockets?

Mid- and small-cap stocks have traditionally generated profits for investor portfolios, hence their continued interest.

Except in the US, where large-cap stocks led the indices and small-cap stocks lagged most of the time, in India small- and mid-cap stocks outperformed the Nifty (though they fell more than the Nifty).

The proliferation of PMS, AIF and small caps over the past few years has meant that small and mid caps are being chased to show better performance.

This trend could prove counterproductive if economic growth stalls or markets in some countries begin to collapse.

By then, investors riding on the recent rally had become bolder and were paying high valuation premiums for such stocks, hoping they would improve or catch up with their peers.

The promoters of such companies felt affected by the increase in market capitalisation and changed their approach towards minority shareholders, which is a positive change.

Investors need to balance their allocation between large-, mid- and small-cap stocks and adjust any excesses compared to their original plan.

They also need to be careful with promoters who have had a bad reputation in the past and now act differently.

In the case of small and mid-cap stocks, it is necessary to take some of the profits from stocks that have surged without the right incentives over the past few months.

Where should we put our money in this market? What sectors look attractive for the next 1-2 years?

While all sectors have seen growth (albeit in varying proportions) in a rising market, there may still be some value in some sectors, such as traditional cyclicals — oil and gas, metals, or defensive goods like healthcare and some consumer stocks.

However, given that the fortunes of all sectors tend to change dramatically every few months or that their valuations rise rapidly, it is important to periodically check whether they still offer the same value or margin of safety.

Do you think the market is lacking fresh stimuli? What will drive the market from now on?

Other factors influencing markets include the outcome of the monsoon season (its spread and intensity), the outcome of state elections, the trend in food price inflation, global geopolitical events and the trajectory of global interest rates.

The second-quarter results, due to be published in October/November, will also show how the pre-holiday period went and whether the long-awaited revival of rural areas actually took place.

We have been witnessing a bull market in the Indian market since 2020. Are we coming to the end of it? How long will this bull market last?

It’s a tough call, but we may not be very far from the top in this move. However, after a period of correction/consolidation, we can aim much higher, given the inherent advantages of Indian markets.

When do you expect the US Fed to start cutting rates? How will that impact the market?

Federal Reserve Chairman Jerome Powell said on July 31 that interest rates could be cut as early as September if the U.S. economy continues on its expected path.

According to CME Marketwatch, the probability of a 25 basis point cut at the September 17-18 meeting is 86.5%, while the probability of a 50 basis point cut is 13.5%.

We believe that further interest rate cuts will have to wait until US inflation declines sustainably and the new US president provides greater transparency on fiscal policy.

Do you see any risks coming up? What could derail this market rally?

Our markets face potential threats from internal and external fronts. Internally, if the monsoon does not turn out as good as expected, the much-awaited rural revival may wait even longer.

If the ruling coalition suffers defeats in state elections scheduled for October, reforms could prove uncertain and the political climate could worsen.

To enable a looser monetary policy to stimulate the economy, it is necessary to bring inflation (especially food prices) under control.

Externally, if the geopolitical situation deteriorates enough to impact India (through slower exports, higher logistics costs, higher oil prices and/or higher defence costs) or if there is a downturn in the small and mid-cap market, this could slow down market momentum.

Moreover, if global investors’ appetite for risk-taking decreases, we could see slower inflows or even larger outflows.

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Reservation: The above opinions and recommendations are the opinions of the expert and not of Mint. We recommend that investors consult certified experts before making any investment decisions.