Indian equity markets are currently facing a complex environment, marked by elevated crude oil prices, geopolitical tensions, and rising US bond yields. Abhishek Singh, Senior Vice President and Fund Manager at DSP Mutual Fund, recently offered his perspective on the market outlook, corporate earnings, and strategic investment areas.
Impact of Crude Oil and Geopolitical Tensions
Singh notes that India, as a major crude importer, experiences oil shocks through inflation, interest rates, currency fluctuations, and corporate margins. While interest rates and currency have already seen impact, corporate margins are likely to feel pressure in the current quarter. Despite these headwinds, earnings growth expectations remain robust, projecting mid-to-high teens for large caps and even higher for mid- and small caps.
Exporters, while seemingly better positioned, are still affected by global growth concerns stemming from geopolitics and high crude prices. A resolution to these global issues is ultimately needed for sustained improvement.
Banking Sector: Resilience and Opportunities
Contrary to some perceptions, the banking sector has performed well, with the Bank Nifty outperforming the Nifty on various timeframes over the past five years. Deposit growth, often cited as a concern, is not seen as a long-term constraint by Singh, as credit growth inherently creates deposits, and central banks can intervene if necessary.
Singh remains positive on the banking space, particularly highlighting that strong franchises are currently attractively priced. He also sees potential in insurance and certain capital market-related names over the medium term.
Valuations in Small- and Mid-Cap Segments
Despite recent corrections, small- and mid-cap stocks largely remain expensive compared to historical valuations. Singh emphasizes that the real question is whether their anticipated higher growth rates will be sustained to justify current multiples. He advises caution, noting that in many cases, investors might be assigning peak multiples to peak earnings and margins, necessitating a more risk-aware approach.
Consumer Spending and Sector Prospects
While high inflation and slower growth could impact consumer spending, Singh points out that past periods of higher inflation did not always deter spending. The key drivers are a consumer's earnings growth and future growth expectations. With wage growth lagging revenue growth and increased consumer leverage, vigilance is warranted.
The automotive sector, trading near or below last year's levels before GST rate cuts, presents a potential opportunity. Singh believes much of the negative sentiment regarding lower margin expectations due to higher commodity prices is already priced in.
US Bond Yields and FII Outflows
Rising US bond yields typically act as a gravitational pull on equity valuations. While foreign institutional investor (FII) outflows have been significant, Singh suggests that net flows don't perpetually impact valuations. A more significant concern could be a softening of domestic flows, especially if market returns in small- and mid-cap categories drop to mid-single digits over a three-year horizon.
Key Factors for Stock Selection
Singh's investment philosophy centers on evaluating a business's earnings on its capital through a full cycle, its ability to convert profit into cash, and management's capital allocation efficiency. He stresses the importance of buying the best risk-reward, making price an extremely crucial factor.
Investment Opportunities for the Next 12–18 Months
For investors with a three- to five-year horizon, Singh finds large caps particularly attractive. He also sees potential in interest-rate sensitive sectors like real estate (more for sentiment than direct business impact), defensive utilities, financials, and autos. Conversely, he advises avoiding many segments within industrials, data centers, and manufacturing-related names, where he perceives excessive euphoria.