Revenue growth bounce-back a key factor to watch in H2, says Harish Krishnan of Aditya Birla Sun Life AMC

Even as foreign inflows into China surged after a slew of fiscal and monetary stimuli were proposed to resurrect its housing market weak domestic consumption, Krishnan said in an interview that global investors would expect more concrete policy announcements over the coming months to assess if the policy reset to focus on domestic consumption would shift gears for sustainable economic growth.

Edited excerpts from the interview:

How do you think the Q2FY25 earnings season will look like? Any downgrades expected for H2?

The backdrop of earnings has been a strong expansion in margins in FY24 across most sectors as WPI (wholesale price index) came down last year (from the very elevated levels seen in FY23 due to Ukranian conflict). From this base, we expect margins to normalize. Given this dynamic, the key to assess is top-line growth across sectors. Various high-frequency indicators are pointing to a transient sluggishness; thus, top-line growth of India Inc has slowed down. We expect Q2FY25 to be subdued for consumption, government capex-led sectors even as private capex seems intact. While the first half saw impact of elections and the heatwave, the festive season in H2FY25 is important for top-line growth to bounce back. So far, in FY25, the pace and breadth of earnings downgrades have moved up, compared to what we have seen in FY24, and the commentary of festive season will be keen watched.

Read more: FII outflows so far in Oct second highest in 4.5 years

Mutual funds and direct retail investors have been absorbing the FII selling of late. Yet we see a 5-6% decline in large-caps and Smids (small- and mid-caps) from their highs. Are you fully invested or are sitting on cash?

In our diversified funds, investors allocate us monies with category-wide mandates in mind, and in those funds, we remain reasonably fully invested, adhering to their mandates. In our asset allocation products, where we invest across asset classes, we have substantial allocation to commodities, fixed income, etc. We would be using drawdowns to further increase allocation to equities in these products.

 

Do you feel the China rally can sustain or the structural issues with property price declines will make this a passing show?

After a blistering pace of economic growth over last three decades, Chinese growth is definitely slowing down, post pandemic. While the playbook of China has been to get the manufacturing and export channel to reduce the impact from the massive slowdown seen in real estate, the bigger fault line is sluggish domestic consumption. The Chinese policymaking has to make a significant reset to move away from export-led growth to domestic consumption, while recent policy announcements made a reference to boost domestic consumption, the contours have not been disclosed. Global market participants, over the course of last 18 months, had moved to “anything But China" trade. These recent Chinese policy measures do merit a rethink on those lines, but they will expect more concrete policy announcements over the coming months to assess if this reset to focus on domestic consumption will meaningfully shift gears for sustainable Chinese economic growth.

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What impact on markets, especially ours, do you see from an Israeli attack on Iran?

If market reaction to geo-political events like Ukrainian invasion by Russia is any guide, we expect any impact on such attacks to be short-lived. There is likely to be greater impact on oil markets, given the importance of oil supply lines in the Middle East. Any significant supply cuts can impact India, given its large energy import dependence. There is also likely to be a transient impact on exports, given higher freight costs, and thus a prolonged high-intensity conflict can impact margins and result in some reduction in near-term earnings.

 

Against the backdrop of the rate cut by Fed and other central banks, RBI changing stance, geopolitical worries and the US elections--which are the themes you will play?

We believe sectors such as cement, metals and consumer durables to be “dark horse" sectors – where given the last few years' underperformance as well as relatively low ownership providing us greater margin of safety. While near-term catalysts are limited for these sectors, we see a potential to meaningfully outperform over the three-year horizon. Sectors such as IT, pharma, capital goods and real estate are already in business momentum, with improving earnings profiles and we would use any drawdown in these sectors to further increase positions. We remain positive on an improving investment cycle, given relatively stronger economic fundamentals and strong corporate health.

How do you see private capex panning out? Are you satisfied thus far?

After almost a decade of stagnation from 2011-2020, private capex has moved into first gear. Pre-Covid, capex of listed India companies was close to ₹6 trillion, similar to profit pools of listed India Inc. From there, while earnings have crossed ₹15 trillion, capex has moved closer to ₹10 trillion annually. Thus, there is a problem of plenty (excess cash flows more than capex). We expect improvement of animal spirits on continued relative outperformance of the Indian economy and resumption of strong consumption growth, which has been on a subdued path over the last 12-odd months. Corporate India balance sheets are in a strong position, banking system is adequately capitalized--we do expect continued strength in private capex to sustain.

Apart from equity, debt inflows have been encouraging, courtesy of the JP Morgan index inclusion of government bonds. How do you view fixed income?

With US policy rates headed lower, and RBI signalling a change in stance to neutral, we believe there are prospects of further rate cuts. We continue to have a favourable view on Indian fixed income as well. Unlike in the US, where there are expectations of significant cuts, we believe room for Indian policy rates are a lot shallower. Given the strength of corporate balance sheets and investment cycle still in the early stages, we believe there are more opportunities on the credit side as well from a fixed income point of view.