Markets have been over-optimistic in foreseeing rate cuts: Rahul Bhuskute

The biggest possible risk for Indian equities and for all asset classes globally is the possibility of delayed interest rate cuts by central banks globally, says Rahul Bhuskute, CIO, Bharti AXA Life

India appears to be in a goldilocks situation now with the macro and micro factors just right for sustained equity market performance, RAHUL BHUSKUTE, chief investment officer (CIO) at Bharti AXA Life Insurance tells Harshita Singh, in an email interview. Edited excerpts:

With equity markets at record highs, is it time for investors to book profit?

India appears to be in a goldilocks situation now with the macro and micro factors just right for sustained equity market performance. Economic activity uptick, manageable current account deficit (CAD), declining inflation, likely peaking of interest rates, good capex outlook and strong earnings expectations, all point to an environment of positive market sentiment.

Risk appetite also seems to have increased, not just in India but in markets across the globe. Equity markets are never smooth and we would definitely expect a fair bit of volatility given the recent rally. That said, there are still pockets of opportunity to provide the market with more legs to run, though we acknowledge that some other segments of the market are now expensive.

Are there any risks yet to be priced in by the markets?

Possibly the biggest risk, not only for the Indian equity market but for all asset classes globally, is the possibility of delayed interest rate cuts by central banks globally, especially the US Fed, and interest rates remaining higher for longer-than-expected. Markets have so far been over-optimistic in projecting rate cuts. A slowdown in discretionary spending, El Nino's impact on rain, agriculture and the rural economy, fear of a spike in commodity prices driven by China's recovery, and a slowdown in global demand are some of the other risks to markets and earnings.

Is earnings growth now at par with market valuations?

After the recent run-up, the Nifty now trades at a PE of about 20.6x FY24 and 17.7x FY25 expected earnings, which remains higher than historical averages. However, the growth in earnings also remains higher than what we have seen historically, and this is a key reason driving elevated valuations. There is still scope for earnings to catch up.

Do you expect FII flows to sustain given valuations are getting stretched at record-high levels? Are there other markets that may pose competition for India?

FIIs had considerably lightened their positions in Indian equities last year and were holding historically low positions across companies. That said, this may be just the beginning of sustained interest from foreign investors in Indian equities this year. However, we do understand that several emerging markets could vie for the same pool of FII money, including those of Korea, Indonesia or the Philippines. These markets remain relatively smaller than India as evidenced by their weights in the MSCI index.

China is one large market that could draw away a lion’s share of the FII inflows; however, the economy currently remains unexciting in terms of future outlook. We would not write off China completely, and this may be one market, which could pose a competition for India if they get their act together and strongly revive their economy. 

Which sectors are you most bullish and bearish on from a medium to long-term perspective?

We continue to expect domestic sectors to outperform in the medium to long term. Specifically, we remain bullish on financials, manufacturing/industrials, real estate and consumer discretionary (including auto). We are selectively positive on consumer staples where we see a volume and margin recovery story but are watchful of the near-term impacts of El Nino on the rural economy. Our underweight sectors include IT, metals and oil & gas.

How much allocation do equities have in your AUM?

Our asset allocation is skewed towards fixed-income instruments in our traditional/non-linked funds, with equity exposure at up to 10 per cent of AUM. Our linked products (equity ULIPs), however, have an asset allocation that allows investment of up to 100 per cent in equity (large, mid or small cap).

Can the IT sector be looked at as a contra bet?

The Nifty IT index is still 25 per cent off its peak of January 2022 amid macroeconomic challenges in the US. Valuations have corrected massively for almost all Indian IT stocks. IT companies have been highlighting the cautious stance of their clients, which is expected to keep FY24 growth in check. There is still some time before sentiments revive in Indian IT.

However, given the weight of this sector in the index (currently, this sector is massively under-owned in portfolios), and also the fact that this sector boasts of some of India’s largest and best-run companies, the turnaround rally in this space is likely to be sharp. As such, it might be better to start buying into the sector gradually, rather than waiting for the best time.