By Mahesh Nayak, Nesil Staney & Ananya Grover
As Indian equity market rebound on easing geopolitical tensions and tariffs concerns, Lakshmi Iyer, CEO-Investments & Strategy at Kotak Alternate Asset Managers tells Mahesh Nayak, Nesil Staney & Ananya Grover that it’s not a market to sit on cash. However, she cautions that without earnings growth, markets may face another disappointment. Excerpts:
Q: How do you see the markets, and do you think making money is easy?
A: Making money in the markets is not easy. Earnings have continued to disappoint and are down, but prices are going up, making valuations expensive. We’ve seen the forward P/E ratio increase from 18.5 during the all-time high of September 2024 to move upward to 20.5 times currently.
Q: What are your expectations for the market in the near term?
A: I expect the market to be choppy, but with a slight marginal tilt towards a bullish outcome. The next two quarters will likely be wobbly.
Q: What factors are influencing your outlook?
A: Geopolitical uncertainty seems to be under control for now, and crude oil prices are expected to be bearish, which would be beneficial for India. Additionally, the shift of manufacturing from China to India and favourable terms of trade are positive signs.
Q: Do you think these factors will lead to a significant change in India’s deficit situation?
A: Not overnight. While the deficit is under control, it will take time for significant changes to occur. Rome wasn’t built in a day, and similarly, it will take time for India’s economy to reflect these positive trends.
Q: Lack of alternative investment options is driving people to equities?
This trend is common globally when investors seek returns that outpace inflation. Historically, equities have been the most reliable asset class for long-term returns that outpace inflation. If you aim to double your investment in 6-8 years, equities are likely your best bet. In contrast, fixed-income options may take longer, especially with declining interest rates. As interest rates dip, deposit rates are being cut across banks and NBFCs, leaving savers with limited options.
Saver is getting miffed. They have to become investors. Caterpillar has to become butterfly, no two ways about it. Ultimately, there’s no alternative to investing in equities if you want to grow your wealth over time.
Q: What’s your concern for the markets?
My market concerns are twofold: geopolitics and muted earnings growth despite the market surge, which seems driven by liquidity. India’s relative outperformance and favourable inflation and interest rates are positives. While China may be cheaper, it lacks the confidence of foreign investors that India currently enjoys. However, market valuations are not cheap, and I’d be cautious without strong earnings growth. We’re expecting 12% EPS growth for FY2027, but need to see it materialize. The key will be whether companies can deliver on earnings expectations and justify current valuations. Earnings have to pick up, if they don’t, then the markets can be in for another round of disappointment.
Q: What is your view on foreign flows?
Foreign flows are currently positive, and both FIIs and DIIs are supporting the market. Even if FII flows slow down, it may not significantly impact India’s market momentum due to its strong growth prospects. Foreign investors have realized that entering and exiting India can be expensive due to its growth-driven market dynamics. India’s growth rate far exceeds the global average, making it an attractive investment destination.
Q: Will you be a buyer in this market?
A: Yes, I will definitely be a buyer. I’ll buy on every dip, and every time the market falls by 1.5%, I’ll keep putting in money. This is not a market to sit on cash, I might probably take a slightly more guarded view. I’m planning for the next 12 quarters, not just 12 months. I’ll keep investing wherever I spot opportunities, focusing on cherry-picking stocks rather than buying entire sectors.
Q: Why do you think this is a good time to invest?
A: The slowdown in foreign capital flows has led to a situation where demand is tepid, but supply is still there. This creates opportunities for investors to pick up good businesses at attractive prices. It’s not a consensus trade, and that’s what makes it appealing.
Q: How would you structure your asset allocation?
A: My asset allocation is heavily skewed towards equities, with over 80% of my portfolio in equities. I have a small allocation to gold (around 5%) and the remainder is kept as dry powder for opportunistic investments or trades.
Q: How do you use your dry powder?
A: I use it to take advantage of opportunities that may arise, including unlisted/private companies. I also use it to invest in specific stocks or sectors that I believe have potential for high returns.
Q: What kind of opportunities are you looking for?
A: I’m looking for opportunities that are not yet popular, where I can cherry-pick stocks or businesses with high growth potential. The current slowdown in foreign capital flows into the unlisted market has created opportunities for investors like me.
Q: What do you suggest for equity investments?
A: I would recommend predominantly investing in large caps, with at least 70% of the portfolio allocated to them.
Q: What about mid caps and small caps?
A: Mid caps and small caps require cherry-picking, and it’s a more nuanced game. Small caps, in particular, have questionable earnings visibility and inflated prices.
Q: Why are small caps risky?
A: Prices have gotten ahead of earnings, and it’s unlikely that businesses can keep pace with the inflated valuations.
Q: Which sectors are you bullish on?
A: I’m bullish on BFSI, especially banks. I also like pharma, which has been doing well. We’ve added capital markets and NBFCs to our portfolio, which others were avoiding. We’re bullish on certain NBFCs, particularly those in the mortgage space, as declining home loan rates could boost their performance. We also like asset-backed NBFCs, but our preference lies with private sector banks, which we believe have strong potential.
Q: What drives your optimism about interest rates?
A: With yesterday’s inflation rate at 3.19%, I expect interest rates to come down. We see 6% on the 10-year benchmark, possibly even lower.
Q: How much do you expect the repo rate to be cut this year?
A: We expect a 50 basis point cut this year, with a 25 basis point cut likely next month.
Q: How do you see the corporate bond market?
A: The corporate bond market typically follows the GSEC market. We’re buying select corporate bonds now, as they’re offering good spreads of 60-70 basis points even in the triple-A segment. They offer good carry in a lowering interest rate scenario, making them a good buy-and-hold investment.
Q: Do you think Foreign Portfolio Investors (FPIs) will invest in corporate bonds after the regulatory change?
A: FPIs might take their time, as high-yield bonds in the US are giving them attractive returns. They might prefer sovereign bonds, which have been included in the index, rather than taking on the extra risk for a small yield pickup.
Q: Where do you see the Indian rupee?
Currency situation seems manageable, with the current exchange rate around 84.50. I expect it to remain relatively stable, potentially appreciating to the 84 mark. The RBI may intervene to make adjustments. The dollar’s depreciation has stabilized, and the US not cutting rates could support the dollar. I anticipate the exchange rate to fluctuate within a narrow range of 84 to 85.5. Our previous forecast suggested the rate could test 83.5 levels, and this view remains unchanged. A stable currency gives confidence to foreign investors, which is positive for equities. This stability can help sustain foreign flows, supporting the market.