Quality stocks fairly valued, avoid low-growth bubbles: PGIM India MF CIO

The volatility in the equity market may persist for an extended period as early trends in the third-quarter (Q3) results and management commentary are not promising, says VINAY PAHARIA, chief investment officer (CIO) at PGIM India Mutual Fund (MF). In an email interaction with Abhishek Kumar, Paharia says that the medium-to-long-term outlook remains positive. Edited excerpts:

 

How long do you see the ongoing consolidation in the market continuing? 

One reason is that consumption, which sharply increased after the pandemic, now appears to be slowing down. The downturn in the first half of 2024-25 (FY25) was partly due to adverse weather conditions and a reduction in government spending ahead of the general elections. This slowdown has likely continued into Q3FY25, based on early trends and management commentary from Q3 results.

 

Earnings growth may face downward revisions, leading to market volatility and drawdowns. However, the medium- to long-term outlook for the equity markets remains healthy, given expectations of strong gross domestic product growth over the long term.

 

What is triggering the sharp foreign portfolio investor outflows? 

Foreign investors may have multiple considerations, including more attractive valuations in other markets. An increase in risk-free interest rates in their home markets could also be a factor. The most recent trigger appears to be the re-election of Donald Trump as US President. The US market is seeing record inflows, while many other markets are facing outflows.

 

How do you view valuations? Is it the right time for investors to raise their equity allocation? 

Valuations are elevated compared to historical averages, particularly in the midcap and smallcap segments. However, valuations vary depending on the quality of the company. At present, it is the low-quality, low-growth stocks that are trading in a bubble zone, while high-growth and high-quality stocks are available at reasonable prices. We do not believe it is the right time to increase equity allocation.

 

Are you making any noticeable sectoral shifts in your portfolios, and which sectors are you currently overweight/underweight on? 

We are optimistic about the healthcare, telecommunications, consumer discretionary, private banking, and information technology (IT) sectors. Some of the themes we are positive about include quick commerce, online food delivery, organised retail, many internet-based businesses, and contract manufacturers of electronics and pharmaceuticals, along with other manufacturing sectors.

 

What are your expectations from the upcoming Union Budget? 

The government may look to strike a balance between fiscal discipline and stimulating economic growth. We expect measures to boost consumption and a greater focus on expanding capital expenditure.

 

Given that ‘quality’ as a factor has started to outperform and your preference for such stocks, do you expect your fund performance to improve? 

Our fund performance has already improved since June 2024, reflecting the market’s growing preference for growth and quality. There is a multi-year investment opportunity to invest in a diversified portfolio of high-growth and high-quality stocks. This segment of the market has delivered strong performance over the five- and 10-year periods. However, the reverse was true in the recent past.

 

Our internal estimates suggest that within the Nifty 500 index, high-growth, high-quality companies underperformed by as much as 35 per cent between April 2023 and June 2024, despite their earnings growing at a faster pace. We expect the market’s shift towards high-quality, high-growth companies to continue gradually over the next one to three years.

 

Which sectors could be impacted by Trump’s policies, and what are the potential implications for Indian investors? 

The complete and unprecedented control of all arms of the US government by the Republican Party may lead to higher US earnings through corporate tax cuts, higher tariffs on imports, and increased US fiscal deficits. While the tax cuts and higher tariffs will be negative for emerging markets in general, the higher deficit may result in eventual US dollar weakness after the initial euphoria.

 

Export-dependent sectors such as IT services, pharmaceutical, commodity, and manufactured goods exports could experience volatility in their business outlook due to policy changes. 

THE RED WAVE’S FALLOUT: TRADEWARS, TAX CUTS, 

 

• CORPORATE TAX SHIFTS: Surge  in US earnings, global trade  disruptions
• TARIFF HIKES: Emerging markets, especially India, likely to feel  the pinch
• US DEFICITS SURGE: Short-term $ strength, long-term pressure
• EXPORT SECTORS IN FLUX: IT, pharmaceutical,  commodity, and manufacturing  face volatility