Key Insights from Bajaj Finserv Asset Management Limited
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- India stands out as a favorable investment destination globally, offering promising opportunities in both equity and debt.
- The real GDP growth rate in India is the highest among large economies, expected to persist in the medium term due to favorable demographics and increased female labor force participation.
- Public finances, including forex reserves and external debt, are at comfortable levels, providing resilience against external shocks.
- Despite a high fiscal deficit, post the COVID-19 surge, India is on a path of consolidation, indicating long-term economic stability.
- Robust tax collections, both indirect and direct, reassure the government’s capacity to fund ambitious infrastructure development plans.
- Private consumption and corporate capital expenditure are on the rise, with corporate India investing in new factories, robotics, automation, and technology after a prolonged hiatus.
- An improved corporate balance sheet ensures that a lack of funds does not hinder the emerging private capital expenditure upcycle.
- India’s consumption demand is expected to follow a ‘J’ curve, fueled by a surge in discretionary consumption as per capita income crosses the US$ 2500 mark in 2023.
- Premiumization trends are evident in sectors like cars, real estate, and other discretionary items, expected to strengthen further.
- Domestic flows, particularly in mutual funds, are strong, with assets under management (AUM) at an all-time high, supported by consistent SIP flows.
- High-speed indicators, including e-way bills, port activity, and government spending on capital expenditure, are tracking positively.
Key Risks to Watch:
- Slowdown in the global economy affecting trade, flows, and prices.
- Adverse election outcomes leading to political instability (a low probability event).
- Erratic weather delaying rural economic revival or diverting funds from capital expenditure to support rural economy.
Sectoral Outlook:
- Banking sector experiencing improved growth rates with low non-performing loan (NPL) accretion and high capitalization levels. Valuation remains comfortable.
- Consumer staples facing demand headwinds, with premium segments performing better in comparison to affordable segments. Opportunities for undervaluation exist in the sector.
- IT services witnessing a weak demand environment due to an expected slowdown in the developed world. Cost pressures have eased off.
- Capital goods and industrials expecting a cyclical upturn in demand, though government orders might slow down during general elections. Bottom-up research validation is crucial for exposure.
- Pharma sector experiencing a cyclical pick-up in export-focused companies due to drug shortages in the US. Margins supported by falling input prices. Event risks (USFDA inspections) remain significant.
- India trading at a premium to emerging markets, justified by better return ratios and higher growth differentials.
- Quality as a category has underperformed, emphasizing the importance of choosing exciting businesses over stocks in the current market scenario.
In the fixed income market:
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- Interest rates have likely peaked and are expected to reverse.
- India is well-placed fundamentally and in terms of flows.
- A favorable time for investors to lock in yields, with potential for high coupon, capital gains, and low credit risk.
