Nifty may consolidate between 22,000 and 26,000, says Rahul Arora

Rahul Arora, CEO for institutional equities at Nirmal Bang, tells that, with earnings disappointments in India, foreign flows may not return immediately

Dalal Street bulls are keeping their fingers crossed in the hope of a blockbuster year as markets enter Samvat 2081. RAHUL ARORA, chief executive officer for institutional equities at Nirmal Bang, tells Puneet Wadhwa in an email interview that, with earnings disappointments in India, foreign flows may not return immediately. Edited excerpts: 

 

How are you welcoming Samvat 2081 — with a sense of caution or optimism that the worst of the market fall/correction is behind us?

In the old clichéd adage, I would say cautious optimism, and more cautious than optimistic, as the fact remains that we are in an earnings downgrade cycle and have been for some time now on an aggregate level.

 

The markets, at their recent peak, had gone past the ‘priced to perfection’ phenomenon, leading to severe punishments of witnessing bad news and results that missed expectations.

 

While domestic growth is relatively resilient, we are in the midst of cyclical moderation. There are signs of a rural recovery, but it is not very broad-based.

 

Stagnant wage growth is affecting the urban workingclass in an environment of elevated food inflation. The Nifty might consolidate in the range of 22,000–26,000 for the next 12 months.

 

What’s your best- and worst-case scenario for the Indian markets for the next year?

We remain cautious due to earnings downgrades, but supportive domestic liquidity and relatively favorable global liquidity could act as a floor for the markets. At the index level, there is limited scope for a sharp correction of over 10 per cent.

 

Have the global financial markets fully priced in the outcome of the US presidential polls?

A pro-market president in the U.S. may encourage a rotation of flows back to the US, especially as the economy is holding up well. On the flip side, lower interest rates in the US will eventually be positive for flows into emerging markets (EMs).

 

Which stock markets across the globe is Big Money likely to chase in the short-to-medium term?

China’s announcement of stimulus, while not very material in terms of the quantum of expenditure, included direct support for equities, leading to outflows from most EMs, with India seeing the largest outflows.

 

With earnings disappointments in India, foreign flows may not return immediately. Although valuations have moderated slightly, they are still not at what one would consider ‘very attractive levels’. However, given that our growth is likely to exceed that of most developed and developing economies, India will likely continue to command a growth premium over its EM peers.

 

What’s the outlook for mid and smallcaps in Samvat 2081?

Valuations had been far more stretched in the mid and smallcap space; hence, a correction was expected. While it would be difficult to call the bottom amid an earnings downgrade cycle, the recent correction provides selective opportunities to enter these stocks backed by strong fundamentals and a good runway for growth.

 

What’s your sector preference at the current levels?

Valuations seem favourable for banks, and asset quality, by and large, remains in check, which could provide support to the markets. However, banks with higher unsecured exposure may remain under pressure. Housing finance and gold finance appear to be safe pockets, given an entirely secured book.

 

We are also positive on insurance plays due to rising penetration and demand for protection and pension products, despite near-term margin pressures arising from regulatory changes. The K-shaped recovery is here to stay, implying that discretionary plays like hotels, alcoholic beverages, and, to some extent, quick-service restaurants may outperform staples. Consumer durables and capital goods are largely priced to perfection; hence, negative surprises could trigger corrections.

 

With the US already initiating rate cuts, we see a greater probability of a soft landing in the US, which bodes well for the Indian information technology sector.

 

We are also selectively positive on chemical names that are showing signs of a gradual turnaround, as well as automotive components. Valuations in the defence sector still seem high.

 

Are there any recently listed stocks where you would like to invest from a long-term perspective if you could acquire them at lower prices?

Certain stocks, like Hyundai, seem interesting at cheaper prices. Hyundai is among the few foreign brands that have succeeded in the market with a substantial sport utility vehicle portfolio positioned slightly above market leader Maruti Suzuki. Concerns about royalty payments to the parent company remain an overhang, but that is true for most multinational companies.

 

Swiggy has recently cut its valuation, but the space remains very attractive, so we’ll be keeping an eye on that. We’ll also monitor Bajaj Housing, Waaree Energies, and Aadhar Housing Finance.