This CIO sees earnings improvement in 3 sectors if monsoon arrives as expected

The fact is that foreign institutional investors (FIIs) continue their selling spree, ending on May 17 for the fifth consecutive week. However, it is also important to understand that continued FII selling has nothing to do with uncertainty about election results. This has more to do with relative stock market valuations and sharp differences in recent market performance.

During the month from April 11 to May 11, the Indian stock market underperformed. While the S&P 500 and Stoxx 50 gained 1.04%, respectively, during this period. and 1.07 per cent, Nifty fell by 2.06 per cent. The Shanghai Composite and Hang Seng indices recorded significantly better results.

The Chinese stock exchange has performed much worse than other markets for many years. Last month saw a reversal of this long-term trend. Markets in Shanghai and Hang Seng have outperformed, which has brought investors back to Chinese stocks. FIIs sold in expensive emerging markets like India and bought cheap Chinese stocks. In a sense, they are de-risking by moving from high-value markets to markets where they seem to find greater growth opportunities at an affordable price.

Do you see an opportunity to increase earnings for topics related to rural areas?

If forecasts for above-average monsoons this year prove true, it will help agricultural production and support rural incomes. The market expects demand to rebound in rural areas after a good monsoon season. Shares of Indian companies, which derive much of their revenue from the interior, are showing signs of recovery as traders bet that heavy monsoon rains will lead to better crops and spur demand in rural areas.

We see that motorcycle manufacturers, agricultural equipment manufacturers and fast-moving consumer goods manufacturers have rallied following the on-time and above-normal monsoon rainfall forecasts for 2024 by the Indian Meteorological Departments and Skymet, after extreme and unseasonal heat wreaked havoc on India’s agriculture sector over the last two years. Sales volumes in rural areas are improving, and several large consumer goods companies forecast better economic conditions in the future.

Therefore, we see an opportunity to increase earnings in rural areas if basic conditions are met, such as an abundant and geographically well-dispersed monsoon.

Are you optimistic about the entire real estate area and ancillary facilities, or do you want to be selective (any specific segment)?

In FY24, the Nifty Realty Index emerged as the best performing sectoral index with a fantastic return of 132 per cent. Most of the stocks in the index have seen significant gains over the past fiscal year.

Historically, real estate has remained India’s favorite investment destination, attracting a significant share of household savings. As the country continues to grow economically, the growing middle class is seeing increased disposable incomes, which in turn increases the demand for residential real estate. According to the Wealth Report 2024 prepared by the global consulting company Knight Frank, it is predicted that the number of very wealthy people (with a net worth exceeding USD 30 million) will increase from 13,263 in 2023 to 19,908 in 2028. This forecast means the expected increase in investments flowing into the Indian real estate market.

There is a demographic shift towards a more affluent lifestyle, fueling demand for luxury homes that offer amenities and conveniences beyond those found in conventional housing. Apart from this, the government’s push to extend governance to a wider section of society under the Prime Minister’s Awas Yojana and extending some benefits to affordable housing schemes is expected to provide a huge boost towards the development of the wider real estate sector, including ancillary facilities.

Do you see a big change in politics after the general election results?

The market always expects continuation of pro-business policy and reforms conducted by the government. As a market participant, we also fit into this school of thought. Publicly available information shows that while the election process is underway, government officials are already working on the next government’s key target areas and first 100-day action plan.

We therefore see a further acceleration of pro-economic development and growth policies and a continuation of the pace of reforms unless there is a massive deterioration in performance leading to the formation of a not very strong government at the Center, which may slow down the pace of economic growth and the pace of economic reforms and policy implementation.

How do you evaluate the March quarter earnings season and first quarter 2025 earnings?

March saw a slowdown in overall economic growth across all sectors as nominal growth weakened last year and inflation slowed. Sectors such as automotive, capital goods and pharmaceuticals saw improved gross margins due to lower production costs, which helped drive stronger earnings growth. Sectors linked to the global economy and export-oriented companies are experiencing continued slowdown, especially IT and chemicals. In some sectors, such as consumer staples, volume growth was weak in the single digits due to slow recovery in rural consumption. The real estate, hotel, travel and tourism sectors continue to perform well.

A revival of manufacturing activity in China and the disposal of excess inventories could dampen growth and profits in the chemicals sector. The commodity problems that the manufacturing sector has been struggling with will soon begin to ease; The BFSI sector will continue to perform well and outward facing sectors may continue to decline. If the monsoon arrives as expected, we may see a revival in the rural sector and thus an improvement in FMCG, tractor and two-wheeler sales in the future. Overall, given the strong economic fundamentals, we can expect broader markets to perform well.

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