Indian market’s short-term outlook clouded by valuation risks: Niraj Kumar of Future Generali Insurance

In an interview with Mint, Niraj Kumar, Chief Investment Officer of Future Generali India Life Insurance Company said while India remains an attractive investment destination for long-term investors given its strong macro fundamentals, the current valuations offer a limited margin of safety. Kumar also talked about the sectors that look attractive at this juncture and how General Elections 2024 will influence the market.

Edited excerpts:

Considering the current market situation and macroeconomic environment, what could be an ideal investment strategy for the next one to two years?

The global economy has been witnessing conflicting signals in terms of economic activity and growth. While the US and India have been holding firmly, the European economy along with China has slowed down materially. 

In the future, as the lagged impact of the global synchronous tightening plays out, we believe that global growth will decelerate even further. 

As the growth slows down, inflation will give way to growth as the primary concern for the policymakers and hence we believe that we are very close to the peaking of the interest rates globally and the cycle should start to reverse over the next few quarters. 

Against this backdrop, post the strong run-up in equity markets since April, we find equity markets fairly priced. 

The run-up has been especially sharp in the broader markets where SIP money continues to come unabated and hence that segment of the market has indeed turned expensive. 

While structurally we remain constructive on the markets owing to the multitude of factors like macroeconomic stability, visibility of 7 per cent+ growth for an elongated period, cleaned up corporate and banking system balance sheets, favourable demographic, etc., we will continue to tread with caution in the near term would be selective and nimble in our investment strategy. 

We would prefer domestic-oriented large-cap stocks in our equity portfolio that are still offering value and would trim our exposure to the broader markets and global cyclical. 

We also believe fixed income is emerging as a very credible investment option. The fixed-income market is providing an opportunity to lock in interest rates at elevated levels and benefit from the eventual reversal of the interest rate cycle.

Where is money in this market? Which pockets of the economy look appealing to you?

While India remains an attractive investment destination for long-term investors given its strong macro fundamentals, the current valuations offer a limited margin of safety. In this context, we are strongly inclined towards large-cap which is still offering decent value. 

We remain constructive on the earnings growth prospects of the domestic facing sectors like BFSI, cement, capital goods and infrastructure, etc. The BFSI sector is the best way to play revival in the capex cycle as well as discretionary consumption. 

The banking sector has cleaned up its legacy asset quality issues and has fortified balance sheets, with strong growth and normalised return ratios. 

While the margins have indeed peaked we believe that earnings growth will continue to remain strong aided by robust advances growth and controlled credit costs. 

Yet, the sector is perhaps the only large sector that is trading below its median valuations, providing a significant margin of safety. We are also enthused with the recovery in the capex cycle. 

The ordering momentum that we are witnessing in infrastructure, defence, railways, and power (smart meter, renewable energy) is unparalleled. We believe that capex-related sectors will see sustained earnings growth on the back of strong spending. 

Softening commodity cost is yet another theme we are focussing on. With the relentless fall in the major commodities like aluminium, zinc, pet coke, coal, etc., the end user industry will see major margin expansion. Cement stands out as a major beneficiary of this.

We have upcoming key state elections followed by General Elections 2024. How significant these events are for the markets? How should investors navigate uncertain times?

Prima Facie, elections have a significant impact on the directional movement in markets, if there are indications of a regime shift as it may bring about a shift in policy direction or signs of potential political instability. 

We believe that the upcoming state election will set the tone for the national elections in 2024. However, in the current context, we do not anticipate that elections would cause any changes in the structural outlook for the Indian economy. 

Hence, we would advise investors to stay invested through times of volatility and use any substantial dips as an opportunity to buy into fundamentally sound companies while avoiding exposure to sectors that can get adversely impacted in case of unfavourable electoral verdicts.

Is the worst behind for the IT sector or are we yet to see the worst?

Indian IT industry’s fortunes are strongly linked to the fate of the global economy. With the impending slowdown in the global economy over the next few quarters, we believe that Indian IT companies will continue to struggle to grow at a rapid pace. 

Also, the margin trajectory for the sector remains uncertain. While the supply side tightness has receded, there are other headwinds like weak operating leverage, return of facility, travel, visa costs, and annual wage increments which will keep a lid on the margin recovery. 

In this context, we believe that the current valuations of IT stocks are not capturing the near-term weakness in earnings growth. However, from a longer-term perspective, we believe Indian IT is a must-have in any portfolio owing to the superior cash flow generation capacity of the sector along with disciplined capital allocation.

Inflation still remains high. Do you expect a rate cut in the current financial year? How should one invest in a high-interest rate regime?

The headline inflation trajectory remains elevated mainly on account of the spike in food inflation while core inflation is moderating. 

While risks to food inflation remain skewed to the upside mainly on account of global El-Nino risks, geopolitical tensions and uneven spatial and temporal distribution of the monsoon, risks are likely to be mitigated through proactive supply-side measures. 

Consequently, the spikes in food inflation though to some extent inevitable, may be transient.  At the current juncture, central banks across the world remain uncertain about future courses of action as inflation remains above the target range across the world. 

However, we reckon that RBI is done with its rate hiking cycle and globally US Fed and European Central Bank, too, are close to the fag end of their cycle. As growth slowdown starts to hurt global central banks would turn dovish over coming quarters. 

In India, we expect yields to remain steady with a downward bias unless geopolitics throws up new challenges.  From an investment standpoint, we believe fixed income is offering a lucrative alternative investment avenue to lock in rates at higher levels and benefit from the eventual reversal of the interest rate cycle.

What is your view on the insurance sector? What are the opportunities that Future Generali India Life Insurance Company would like to tap into?

Over the years, the product suite of the insurance sector has become simpler and has become friendlier to investors. This along with the low penetration levels and financialisation of savings ensures that the runway of growth for the sector is a lengthy one.

Even though growth in FY24 will be impacted by the high base of JFM 2023 owing to strong prebuying before the removal of the tax benefit, the growth is expected to bounce back from FY25 and will return to the secular growth trajectory. 

Future Generali would like to focus on profitable growth with a long-term focus and would continue to offer all the products that offer value for the entire value chain- customers, distributors and shareholders.

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Disclaimer: The views and recommendations above are those of the expert, not of Mint. We advise investors to check with certified experts before making any investment decisions.