In conversation with Nimesh Chandan, CIO, Bajaj Finserv Asset Management Limited

Government’s continued emphasis and rising investments in the infrastructure sector present encouraging long-term opportunities for investors, affirms Nimesh Chandan, CIO, Bajaj Finserv Asset Management Limited

After the significant rally in equity in the current financial year, what is your current outlook for the market? Do you see the momentum continuing in broader markets? 

The Indian equities market is one of the few positive high-growth stories in an increasingly slowing world. Although some external risks are present on the horizon. These external risks include geopolitical stress, global financial system volatility, stock market corrections, El-Nino impact, and weak global demand. 

India experienced impressive growth in FY23, with GDP surpassing estimates and reaching 7.2 per cent. Domestic demand and rising employment levels were the driving forces behind this growth, although inflation posed challenges.

For any growing economy, credit flow is the lifeblood. And by that measure, Indian credit offtake at around 16 per cent YoY growth indicates a healthy appetite for capital. The gross Goods and Services Tax (GST) revenue, which is a proxy for the level of consumption in the economy is rising rapidly. GST collection in June 2023 saw a 12 per cent increase compared to the previous year, indicating rising consumption levels and economic activity. There was significant FII flow in June month showing rising confidence in that investor segment. Additionally, there has been a surge in retail investor participation, evident from the increase in new demat accounts opened.

Earnings per share (EPS) is expected to grow at a 15 per cent compound annual growth rate (CAGR) from FY 2023 to FY 2025. This growth, coupled with the strong balance sheet strength of Indian companies and reduced leverage, will support the market outlook. India's journey towards becoming the third-largest economy in the world further adds to its attractiveness as an investment destination.

Overall, the outlook for Indian equities remains positive, supported by a strong macroeconomic backdrop. In the short term, the market may see sideways movement and consolidate at the top. There’s also a likelihood that global economic uncertainty may cause some volatility from time to time. But a price correction if any, will be short-lived and will be considered a buying opportunity for many. 

*Data Source: RBI, Bloomberg, Internal estimates; Data as on 31st Jul 2023.

What are your perspectives on the present inflation scenario? Are you foreseeing the RBI reducing interest rates in the latter part of the financial year? 

Inflation saw some pick up in June month to rise to 4.81 per cent after sliding downward for four months previous to that. This jump was on account of rising fruit and vegetable prices but that tends to be seasonal. We may see a couple of elevated levels before inflation begins to trend down again. 

If CPI inflation rises to 5.5 per cent or higher in the July-September 2023 quarter (RBI forecast of 5.2 per cent) it is unlikely to change the full-year RBI forecast of 5.1 per cent materially. This is based on the premise that the current sharp spike in vegetable prices will reverse in subsequent months. Therefore, this should not change the reaction function of MPC members as most would exercise patience and treat the current spike as a temporary phenomenon, which does not necessitate any monetary tightening immediately.

The RBI is therefore likely to maintain interest rates at a standstill, choosing to observe the Fed’s monetary policy cycle and the potential impact of the monsoon season before undertaking any further rate adjustments in the near term. 

After rate hike in July, do you anticipate the Federal Reserve to extend the pause in its rate hike cycle for a more extended period? 

US Federal Reserve implemented a quarter percentage point increase in its benchmark lending rate, bringing it to 5.25-5.5 per cent, the highest level seen since 2001. This rate hike had been widely anticipated and Indian markets were hardly surprised by it.

The recent US CPI numbers have shown a significant slowdown in inflation. Monthly core CPI decelerated led by a decline in used autos, weakness in travel-related services, and ongoing gradual disinflation in rents. Downward momentum is evident across core goods, super core services, and shelter. This looks like the beginning of a sustainable disinflation which can continue at least through the end of the year even though the headline number remains much higher than the Fed’s target of 2 per cent. 

We believe that the Fed may have kept the door open for a potential further rate hike. They may want to base their future decisions on further data to assess the lagging impact of monetary tightening and the overall economy before providing any signals about their next course of action.          

How have the Q1FY24 results fared so far? What were the hits and misses?  

Amidst an improved Indian stock market sentiment, investors are closely monitoring the Q1 results of listed companies. 

Many results are yet to arrive therefore it's slightly early to comment on them. However, after a record-breaking rally, Sensex and Nifty witnessed a decline due to results in heavyweight IT and FMCG stocks coming below expectations. Many sectors like financials, auto, auto ancillary, industrials, and telecom are expected to perform well. Metals and mining, on the other hand, may have weak earnings, and IT services growth may slow down.

Some IT majors' revenue guidance is also indicating uncertainty in global markets. In the banking sector, Net Interest Margin (NIM) numbers showed a mixed trend among banks, but asset quality remained steady or slightly better overall. 

What are the three sectors that you think appear promising and offer potential for investment in the long term for retail investors? 

Our perspective on the sector outlook differs slightly. Before considering the investment potential of any sector, we prioritize understanding the key drivers behind its growth. Sectors may exhibit cyclical patterns, re-emerging trends, or be part of a long-term structural growth – known as a Megatrend. We emphasize Megatrends which helps in identifying future profit potentials and positioning the portfolio accordingly. While megatrends filters act as a top-down layer, the bottom-up analysis helps us in identifying the businesses that may potentially benefit from these trends. Our views on sectors will vary depending on the specified time horizon.

Having said that, we firmly believe that India is poised for multi-decade growth, and most sectors are expected to thrive once offshore obstacles diminish over time. Investors should primarily focus on domestic-oriented sectors, given the favourable alignment of multiple themes to India’s advantage. Notably, the “China plus 1” strategy and the Production Linked Incentive (PLI) stimulus are likely to spur growth in the manufacturing sector, particularly in electronics, infrastructure, and capital goods.

Furthermore, the government’s continued emphasis and rising investments in the infrastructure sector present encouraging long-term opportunities for investors. 

The banking sector is also experiencing a phoenix-like revival. With robust capitalization, low Non-Performing Asset (NPA) ratios, and increasing credit demand, the Indian banking sector offers a high-beta proxy play on the Indian economy. 

What is your investment philosophy and strategy as a fund house?

At Bajaj Finserv AMC, our first and foremost differentiator is what is core to our business – our investment philosophy. We’ve added the layer of behavioural finance to the informational and quantitative edges to create a truly differentiated investment philosophy. Most of our products will also be differentiated. We will only enter those active categories where we see an opportunity to generate alpha. If not, we will enter them through the passive space. Even in passives, we’re looking at passive allocation but active management, or what we call smart beta funds.

Our flagship equity product, the Bajaj Finserv Flexi Cap Fund with a Megatrends strategy, was launched on July 24, 2023, and the NFO ends on August 7,2023. A megatrend is a powerful, long-term change that affects economies, industries and companies. Our investors can benefit from the strongest megatrends that our investment experts spot across sectors, themes, market capitalization and geographies. Rather than looking at past performance, our investment team looks at megatrends that are shaping the world, that are monetizable and have long-term impacts, even across sectors. Our Flexi Cap Fund will be a true-to-label fund in its category with a potential high active share component. It will focus on targeting future profit pool industries and will have a relatively low turnover ratio.

Disclaimer: The opinions expressed above are personal and may not reflect the views of DSIJ.