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Auto companies and their affiliates are on a longer upward trajectory, making for interesting stock picks for the next market correction. Selected industrial stocks also look solid, said Shailendra Kumar, chief investment officer at Narnolia Financial Services.
Although bank stocks have largely underperformed over the past four years, he thinks now could be a good place to invest during a market correction.
Regarding the December quarter earnings season starting next week, financial experts who have been involved in providing fund management and investment advisory services for 20 years say that profit margins are likely to shrink to some extent on a quarterly basis, but profit margins are the same as last quarter. It is said that the ratio will be considerably higher. Compared to the same period last year due to the impact of the base.
Let’s take a look at the conversation with Kumar. money control.
If there is a correction in the coming months, which sectors should you bet on?
Auto and auto parts companies are on a long-term upward trajectory, making it interesting to pick stocks during the next market correction. Select industrial stocks also look solid. Bank stocks have largely underperformed over the past four years, but now could be a good place to invest during a market correction.
Some new-age digital companies are also good stocks to invest in, especially those aiming for positive cash flow while maintaining strong growth.
Also read: From the return of FIIs to sustainable growth: 7 themes to address in 2024
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Is it time to move money away from underperforming sectors to IT and pharma?
Although order and revenue growth for large IT companies has been cyclically low, in the mid-to-high single digits, valuation multiples remain high, so there is no reason to place too much emphasis on the IT sector. do not have. We invest highly selectively, primarily by stock, while remaining underweight in his IT sector overall.
In contrast, the pharmaceutical industry seems more interesting. Although sales growth is still not strong, pricing power appears to be slowly returning. So, while we shouldn’t yet expect cyclically high valuation multiples for pharmaceutical companies, we should take selective exposure over time.
Do you think the market has discounted the three or more federal funds rate cuts you suggested in 2024?
Looking at bond yields, it appears that the market is discounting a very aggressive rate cut, and it is likely that the market will disappoint sometime in 2024. The Federal Reserve has guided interest rates at 4.75% at the end of 2024. This represents a 75bps reduction from the current 5.5%.
Also read: Chart: 6 sectors to watch in 2024, according to ICICI Direct
The yield on the 10-year U.S. Treasury note has fallen to 4.2% from a high of 5% in October, when the Fed announced its policy in December, and has fallen to 3.8%. Also, given the resilience the US economy has shown to date, I don’t think the Fed will be in a hurry to cut rates.
Furthermore, does this mean that a soft landing in the US is very likely next year?
2024 is a major election year globally, so any current government will certainly be focused on achieving something like a “soft landing,” and that may continue for much of this year. . The economy also showed unusual resilience, as inflation fell without the large-scale job losses that often occur during high inflation and monetary tightening cycles. This is due to the positive wealth effect on households during the pandemic and the subsequent emphasis on localization, which means improved industrial activity.
But let’s not forget that by the beginning of 2023, the consensus was that the US economy was going to be in recession, and that was proven wrong. Currently, the consensus is in a “soft landing” and the consensus may not work out this year as it did last year. Therefore, while we need to maintain a “soft landing” as our base case, we need to track how the geopolitical turmoil unfolds throughout the year. Major geopolitical disruptions could reintroduce supply chain challenges and subsequently trigger inflation.
Also read: Why is this NBFC an ideal bull market stock?
Most of the professionals who bet on big overseas funds will flow to India next year. what is your opinion?
Issues related to foreign capital flows are currently less important to India’s broader market dynamics. Domestic flows are so strong and structural that they will remain so. The bigger impact of foreign capital inflows will be on the recovery in the relative performance of large-cap stocks. Additionally, if very large FII flows enter the stock market, there is a risk that valuations will rise significantly, and policymakers should consider raising the free float of Indian listed stocks. Dew.
I believe that we need greater flows into the private market in the form of foreign direct investment, especially equity FDI. Although there has been some resurgence recently, FDI needs to reach around 3% of GDP to sustain high growth above 7% in India.
Overall, do you expect the market to consolidate in 2024 and be up about 10%, or will we see an increase of 15-20%?
Stock market returns are never linear. Nifty rose 15% in 2020, 24% in 2021, but only 4% in 2022. In 2023, Nifty rose 20 percent. Therefore, long-term returns average about 15%, but vary widely from one particular year to the next. This yearly variation is due to the company’s earnings growth in that year and its starting valuation.
In CY2023, we achieved very strong corporate profit growth, recovering from the contraction in corporate profit margins in CY2022. For 2024, margins are expected to remain flat. As such, we expect earnings growth during 2024 to be primarily driven by revenue growth, at around 11-12%.
From a valuation perspective, Nifty has been trading in the range of 19-24 times trailing 12-month earnings for the past 7-8 years and is currently trading at 23 times trailing earnings. Even on a one-year-ahead basis, Nifty trades at around 22x, which puts Nifty’s upside below its 2024 long-term average.
We also need to keep an eye on the ongoing geopolitical tensions and several important elections taking place around the world this year. Structurally, rising volatility is the next exciting time to continue adding to Indian equities as the medium- to long-term trajectory remains very strong.
What are your general expectations regarding the financial results for the third quarter of fiscal 2024, which will be announced next month?
Although we expect margins to shrink slightly on a quarterly basis, we expect them to be significantly higher on a year-on-year basis due to the impact of the base. Companies in the automotive, hospital and industrial sectors are expected to perform well. IT, banks and consumers will continue to be disappointed.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not the views of the website or its management. Moneycontrol.com advises users to check with certified professionals before making any investment decisions.
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