Higher interest rates should help prevent NIM contraction, and higher inflation could drive credit growth by an additional 100-150 bps, says Santosh Pandey, President & Head at Nuvama Professional Clients Group. Banks are currently trading at reasonable valuations, Pandey said as he opines that higher interest rates could benefit banking stocks, assuming no major surprises in asset quality.
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Following the Adani bribery saga, markets smartly recovered on Friday and rallied on Monday riding on the BJP-led alliance’s victory. The domestic markets once again proved that no matter how bad the news is, the rebound will be with a much greater force. But the trade has been range bound this month which suggests consolidation. Do you see a clear trend over the next 2-3 months?
The market was in an oversold zone prior to Friday and positive news such as the Maharashtra election exit polls, triggered short covering. While Monday’s gap-up opening reflected this momentum, we believe that substantial market movement will only occur with either a return of FII inflows or a positive earnings surprise. Given the December holiday impact on FII activity and the awaited clarity post-3Q FY25 results, we expect the market to consolidate over the next 2–3 months before a major move unfolds.
Nearly Rs 1.06 lakh crore FPI money has left Indian shores in less than 2 months — first it was ‘Sell India buy China’ and now it is ‘Sell India buy US’ clamour. One of the reasons is that valuations are still high despite a 9-10% correction. How much more correction will bring valuations at fair levels?
We’ve observed a 5% earnings downgrade for FY25E/FY26E Nifty EPS (according to Bloomberg), while the market has already corrected by 10-12% before the recent bounce. This suggests that both derating and earnings downgrades have largely been priced in. The key question now is whether further downgrades are on the horizon, which will only become clear after the 3Q FY25 results. Our base case is a period of consolidation for the next 2–3 months before a more decisive market move.
The earnings season is over and based on the performance and outlook, which sectors/stocks will be in your radar?
Post-earnings season, we find IT, hospitals, and textile sectors particularly interesting, both from an earnings growth and valuation perspective.
While the government is nudging for a lower interest rate regime, economists have warned against a potential destabilising impact of rate cut. Meanwhile, Governor Shaktikanta Das’ own view is that the work on inflation is still not over which puts a spanner on the likelihood of downward revision. Do you think that it could be negative for interest sensitive sectors like realty, auto and do you see banks’ underperformance continuing as a result of this?
I would like to add one more perspective to your question. Trump’s economic policies during his last term were inflationary, which contributes to our view that globally, we are likely in a ‘higher for longer’ interest rate environment. As for the sectors you mentioned, the auto sector faces a high base, particularly in PV/CV, and we expect these segments to underperform.
Realty, on the other hand, is experiencing an 8-10 year upcycle, so stock-specific opportunities will persist.
Regarding banks, higher interest rates should help prevent NIM contraction, and higher inflation could drive credit growth by an additional 100-150 bps. Additionally, banks are currently trading at reasonable valuations. Overall, we believe that higher interest rates could benefit banking stocks, assuming no major surprises in asset quality.
What is your view on the Indian IT sector given President elect Donald Trump’s assertions that he would cut corporate taxes and Fed’s beginning of the rate cut?
As mentioned earlier, post-election sentiment should stabilize for the BFSI sector in North America. A stable interest rate environment could help mitigate treasury losses. Additionally, if corporate tax rationalization takes place, it should boost discretionary spending power. On the whole, we remain very optimistic about the IT sector.
What will be your advice to investors as far as portfolio allocation is considered with regards to large, mid and small cap stocks?
Before the October/November correction, consensus views suggested that small- and mid-caps were expensive, while large-caps were considered fairly valued. However, the correction was sharper in large-caps compared to SMID stocks. Our advice to investors is to be market-cap agnostic. Focus on reasonably valued opportunities with strong potential to double earnings over the next 2-3 years. Additionally, avoid leverage, as market volatility could pose risks.
Also Read: Vodafone, IDFC First among 14 biggest midcap laggards in past 1 year. Should you buy, sell or hold?
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
