Moderate rally in Samvat 2081; DIIs key drivers, says Jignesh Desai

Jignesh shares his outlook on the midcap and smallcap rally, which he expects to persist over the next two to three years, albeit with intermittent corrections that could present buying opportunities

The markets are set to enter Samvat 2081 after a year where midcap and smallcap indices outperformed their larger peers. Jignesh Desai, chief executive officer of institutional equities at Centrum Broking, in conversation with Puneet Wadhwa in Mumbai, discusses how specific stocks in the largecap universe will continue to attract interest. He also shares his outlook on the midcap and smallcap rally, which he expects to persist over the next two to three years, albeit with intermittent corrections that could present buying opportunities. Edited excerpts:

 

How do you see the markets playing out in the next Samvat? Are your institutional clients willing to loosen their purse strings, given the road ahead for the Indian markets? 

Indian markets have seen a steady rally over the past two years. With the general elections behind us, signalling continuity in policymaking, I expect the rally to maintain its momentum in Samvat 2081, albeit at a slightly more moderate pace. There is ample liquidity available with investors. While foreign institutional investors (FIIs) are being selective after the recent run-up, domestic institutional investors (DIIs) are always looking for new ideas to invest in and will be the key drivers for the markets.

 

Where do you think leadership will come from if the markets are to move higher from here? Which sectors could be a spot of bother? 

Indian markets are banking on domestic inflows. We expect interest rate-sensitive stocks to perform well, given the anticipated rate cuts. Public sector enterprise stocks and niche sectors like solar and renewables may see limited upside.

 

Is it the right time to focus on midcaps and smallcaps? 

Largecaps have been in favour for the past few years. While specific stocks will remain attractive, we foresee a rally in midcaps and smallcaps over the next two to three years, with intermittent corrections that could present buying opportunities. However, with these segments, investors need to cherry-pick, as it won’t be a broad-based rally.

 

Barring valuations, what are the key concerns of FIIs regarding the Indian markets? Will their incremental money now find its way to China or other markets? 

Yes, valuations are a clear concern not only for FIIs but also for DIIs. While DIIs will continue to focus on stock-specific opportunities, FIIs might look elsewhere if they find more reasonable valuations. Beyond valuations, the recent slowdown in government spending is a concern, which should ideally pick up by the October–December quarter (Q3) of 2024-25 (FY25), as the government needs to meet its capital expenditure target of Rs 11.11 trillion for this financial year. With China rolling out several stimulus packages, it may attract FII investments.

 

Value versus growth: which side are you leaning on when picking stocks for the next year? And why do you think this strategy will work? 

As mentioned, valuations are currently high. However, there are several stocks where the growth story is still unfolding, so we are leaning towards growth. We have seen the US Federal Reserve pivot and cut rates recently. With another 50-basis point cut anticipated, we expect the Reserve Bank of India to follow suit, which could attract inflows as the interest rate differential improves. We see growth potential in banking, financial services and insurance, as well as in other interest-rate-driven sectors like housing, automotive, and infrastructure.

 

What are your expectations for the July-September quarter (Q2) corporate earnings? Is there room for disappointment, and if so, from which sectors? 

Q2FY25 earnings will likely be a mixed bag, but there shouldn’t be much disappointment, as the economy is performing reasonably well. Banking, pharmaceutical, and industrials should report healthy numbers. Meanwhile, automotive, fast-moving consumer goods, and consumer durables are expected to see moderate growth, as rural demand has yet to gain momentum. The uneven distribution of the monsoon has impacted the yield of kharif crops this season, which could push up food prices and slow the pace of rural recovery. However, Q3FY25 should be better for these sectors, driven by increased demand during the festival season.

 

The Securities and Exchange Board of India (Sebi) has made several recommendations and changes in how trades are conducted in the derivatives segment. Is the market regulator overregulating? How are brokerages coping with the changes and potential loss of revenue? 

Sebi is continually working to protect investors’ interests. The derivatives market is high-risk, requiring in-depth understanding. The proposed changes aim to shield retail/small investors from volatility. Large broking firms should be able to absorb the potential loss of income as they offer diversified services to compensate. However, smaller firms may find it challenging due to reduced trading volumes, leading to consolidation within the broking industry.   

THE MIDCAP & SMALLCAP PLAYBOOK 

 Largecaps have dominated the market in recent years

 Attractive largecap stocks persist, but a shift is underway

 Expect a rally in midcaps and smallcaps over the next 2-3 years

 Intermittent corrections will provide buying opportunities

 Investors should cherry-pick stocks; a broad-based rally is unlikely