Next big mkt surprise likely to be upward: Investec India's Mukul Kochhar

The market fall has created a favourable investment landscape, even as investor mood remains subdued, says Mukul Kochhar, head of institutional equities, Investec India. In an email interview with Samie Modak, Kochhar says the most reliable investment approach centres around selecting mispriced stocks and holding them for the long term. Edited excerpts:

 

Has the market turned attractive post the selloff?

 

When market sentiment weakens, valuations often reach more attractive levels. We recently hosted our annual promoter and founder conference, facilitating approximately 6,000 investor meetings across more than 100 companies. The prevailing mood among both companies and investors was notably subdued. Despite this, we believe the recent market correction has created a favourable investment landscape. The Nifty’s forward multiple, currently at around 17x, sits slightly below its long-term average, signalling reasonable valuations. However, even after the correction, the NSE Midcap index trades at a 38 per cent premium to the Nifty, near the upper end of its historical range. While aggregate midcap valuations appear elevated due to pockets of overvaluation, we continue to identify compelling stock-specific opportunities within this segment.

 

Do you expect a sharp recovery seen in the recent past or will the market take time to recoup losses this time?

 

Equity market recoveries and bottoms are always identified in retrospect, making predictions about their timing inherently risky. Instead of attempting to forecast market turns, it's more effective to focus on identifying undervalued or overvalued stocks. And, patiently await catalysts that will reveal their true value. This is why the most reliable investment approach centres around selecting mispriced stocks and holding them for the long term until their value is realised. The current market environment — characterised by reasonable earnings expectations, a recovering capital expenditure cycle, improving trade dynamics, a weakening dollar, and pervasive negative sentiment — suggests that the next significant market surprise is likely to be on the upside. However, a key near-term risk to this outlook is the potential for an unfavourable outcome in US trade discussions, which could impact our market adversely.

 

What are key domestic and global headwinds?

 

Domestic headwinds include national politics and a slowdown in reforms. In a world moving towards bilateral trade agreements, India needs to aggressively integrate with developed market trading blocs. On the global front, slowing economic growth is a headwind for markets, as the largest economy in the world (the US) focuses on reducing government size and spending. This is expected to result in US’ growth slowing to 2.3 per cent in 2025 from 2.8 per cent in 2024. At the same time, current global trade frictions are also not helpful. While this global backdrop is a risk for India, it also presents a solid opportunity for domestic reforms and integrating better with large trading blocs through path-breaking treaties.

 

Does China’s resurgence dim India’s appeal?

 

China’s market resurgence since late September has coincided with significant fund outflows from the Indian market, alongside the “Trump trade,” a narrative for US exceptionalism, and a strengthening dollar. These factors, combined with elevated valuations in India’s domestic market, have driven capital outflows and contributed to depreciation of the rupee. This currency weakening has further dampened sentiment, triggering additional selling by foreign institutional investors (FIIs) and exacerbating outflows. This self-reinforcing cycle has persisted, but we anticipate a reversal in the near future. While China’s trajectory remains uncertain, we expect the other dynamics to shift, as outlined earlier. Normalising valuations in India, a softening dollar, and improving trade conditions should stem foreign outflows. Early indicators of this thesis unfolding include a stabilising rupee and a modest uptick in foreign exchange reserves. Although China’s influence persists as a variable, we believe India’s market performance need not remain tied to China’s in the long term. This is given India’s solid domestic economic fundamentals and increasingly reasonable valuations. A critical risk to watch is the outcome of trade discussions with the United States, India’s most significant partner for goods and services trade.

 

Which are the key sectors you are positive and negative on?

 

We maintain an overweight position in financials, encompassing large banks, insurance companies, and capital market firms. We hold a positive outlook for auto, pharmaceutical, and discretionary consumption sectors — specifically alcoholic beverages and high-quality jewellers —as well as utilities, including oil & gas and power. Within industrials, we favour select chemical companies, major construction firms, and certain electronic manufacturing services providers. In contrast, we remain underweight on consumer staples and information technology.

 

What’s the outlook for banks?

 

Financials, especially, large banks are very well placed. Over the years, higher cost of funding at the challenger banks has encouraged higher risk taking, and eventual stumbles. This has demonstrated that barriers to entry in this business are high and have increased with more compliance and technology costs.  Investor sentiment on the sector is poor as nominal GDP growth, and hence credit growth has slowed. This also makes it a favoured hunting ground for stock picking. In addition, solid corporate balance sheets have resulted in anaemic corporate credit growth. Further concern revolves around normalising credit cost in the near future. 

 

What about the information technology (IT) sector?

 

Outsourced IT, like banks, should witness slower growth, going forward, given that we expect a slower global economic growth (especially US) in 2025. However, contrary to our expectation, investors are bullish and are building faster growth in 2025 versus 2024. Even as growth expectation in 2025 is unreasonable, valuation for most stocks remains elevated. We believe that this positions the sector for underperformance as we get into FY25, and companies start downgrading growth expectations for the new financial year. Consequently, we recommend careful stock selection.