Weak earnings in near term won’t be a negative surprise for markets: Kotak Mahindra S'pore's Nitin Jain

 Nitin Jain, CEO of Kotak Mahindra Asset Management (Singapore).
Nitin Jain, CEO of Kotak Mahindra Asset Management (Singapore).

Summary

  • The initial months of 2025 could witness volatility induced by Trump 2.0, geopolitics or by lack of excitement on earnings, making this a good time to accumulate equities, says Jain

Markets have discounted slower economic growth and weaker corporate earnings in the near term, which means any negative surprise on growth or earnings won't come as a shock, according to Nitin Jain of Kotak Mahindra Asset Management (Singapore).

On the flip side, any positive trigger will be lapped up by investors and could result in sharp upside moves, said Jain, chief executive officer at the asset manager. The initial months of 2025 could witness volatility induced by Trump 2.0, geopolitics or by lack of excitement on earnings, making this a good time to accumulate equities, he said.

Excerpts from the interview:

FII selling has resumed after a month of inflow. What do you make of the new year?

Last year, despite the quarter four volatility, we had a strong year with almost close to a double-digit returns in Nifty with Smids (small- and mid-caps) doing even better. Yes, there were some challenges on economic growth and earnings in the September quarter; and we also had large selling by foreign investors in the last quarter. But net-to-net, it was a reasonably decent year.

As we go into 2025, it's going to be a very exciting year to say the least, because as soon as we go into the year, we would be looking at Trump 2.0 and that brings in a lot of uncertainty for global markets.

There is going to be a lot of talk about trade, tariffs, and immigration. On the positive side, (there is) talk about deregulation and the focus on cutting down wasteful spending in the US to reduce the mounting debt. So that will take center stage.

Going into the new year, we expect slightly better earnings compared to what we saw in the September quarter. The festive season was slow to pick up, but it did pick up towards the end. The wedding season has been a good support for economic activity in the last quarter. The government spending, though, remained less than budgeted. It only picked up at end of the quarter (October-December). So, it's going to be a mixed outcome but a positive outcome as compared to the previous quarter on economic activity, growth, and earnings.

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Foreign investors are already underweight India, from being a traditionally overweight market for them. So yes, there can be some probability that flows in the initial period may be volatile, but we would likely have a much better foreign investor flow through the year. But, more importantly, as last year, this year, the markets will be watching out very closely what happens from a domestic investor flow point of view.

Will corporate earnings beat Street expectations in H2?

As we said earlier, H1 was impacted, of course, by a lot of factors. Not only the lower government spending, there were also extreme weather conditions—an extreme summer and then an extended monsoon. Towards the end of the H1 when food inflation went up quite meaningfully. Now, government spending is picking up, but we haven't really seen [it go] full throttle. Government spending is not typically a switch on/off process, and it takes time for it to come back to full-throttle. What we would expect is that in the January-March quarter, we would see the biggest impact of the government spending coming back. We also know that the extended monsoon impacted consumption, but [that also] means that [we] will have a strong winter crop which will be harvested around March. But the full impact of the good winter crop, we will see most likely towards the end of the quarter or going into the next year fiscal year starting April.

On aggregate, corporate earnings are likely to be better than what the Street expects. At this point of time, a weak economy or weak earnings are no longer a negative surprise for the market. The market already expects [that]. But on the flip side, any positive news will be welcomed, maybe even with exuberance and irrationality, by the market. By this point of time, the base assumption is that there is going to be a negative surprise, and that itself is a good outcome for the markets.

If private capex doesn't pick up pace and government spending is constricted by financial deficit considerations, the high valuations, especially in mid- and small-caps, pose a risk to these segments?

When you think about it, in the last two years, the fiscal deficit has been moderated quite sharply from levels of around 6.4% in 2023 to last year, where we ended at 5.6% and then we are targeting 4.9% for the year ending March 25 and then to bring it down to 4.5% by March 2026. When we have fiscal kind of considerations like these, that is going to have some impact on overall growth. We also know that there were tight monetary conditions, so that also had its impact on the overall growth in the economy. But mid- and small-caps and not just driven by government spending. There are many sectors which are not linked to the government spending or capex meaningfully, and they did pretty well. And I don't think that there is any reason to be to change our view. There are areas like EMS (electronic manufacturing services) space, the internet digital economy, healthcare, hospitality, IT services, real estate, among others, and they have had a good business environment despite lower government spending. We see a limited impact overall on mid- and small-caps from the government capex not picking up.

Private capex has been a story that we haven't seen a broad-based pick-up yet, and yes, certain capital goods and industrials, where there is anticipation of new private capex cycle kicking off, may see some worries and there could be some challenge on near-term valuations, but the underlying fundamental of a new private capex remains very, very, very strong. There is very low leverage in the corporate balance sheet. We know that in FY24, corporate India raised highest ever capital from primary market that has further augmented growth capital. There is a lot of dry powder sitting in corporate balance sheets. Capacity utlization is also above the long -term average but aggregate demand momentum is missing. At this point of time, we don't see private capex growth as a big worry.

It's a good time to buy the fastest growing emerging market or rather the fastest growing large economy at a reasonable valuation.

What is the advice you're giving to clients on returns?

Our clients are global investors, mainly institutional. We are at a very interesting juncture where the biggest market, the US, is doing pretty well, and the US market is now almost 70% by weight (m-cap) of the MSCI indices. Now, when that market does well, everyone else pales in comparison. Emerging markets have to offer something better for getting investor attention.

As we noted earlier, investors expect somewhat weak economic growth and earnings growth in the near term, and that itself is a positive as expectations are low this year. If you look at trailing multiples, at the end of December, the trailing multiple of Nifty index was the lowest in the last eight years. Absolute levels are still not cheap, but still it was the lowest number in the last eight years. From a starting point, valuations are reasonable, and earnings, which were disappointing in the near term, are likely to be much better going ahead.

Our view is that in the initial months of volatility, which could be driven by Trump 2.0 or geopolitics, or also maybe a lack of excitement and earnings in the Indian market, would be a good time to accumulate Indian equities. It's a good time to buy the fastest growing emerging market or rather the fastest growing large economy at a reasonable valuation. I wish we could advise our large institutional investors globally to follow the approach of retail investors in India and do a SIP sort of a continuous investment into Indian market. That is the best approach. But this is the time that global investors should utilize to buy into the long- term Indian growth story.

Which pockets of the market look good, and which ones will you avoid?

If you look at last year and not only last year, but post covid, mid- and small-caps have done far better than large-caps, primarily driven by two factors--with the core factor being earnings. Earnings have been better in mid- and small-caps, accompanied by better balance sheets. And the other big factor is obviously flows. There has been a lot of dedicated flows towards the mid- and small-cap funds from domestic investors, through mutual funds in particular. We expect mid-teens kind of earning growth from large caps, and we expect better earnings growth from mid- and small-caps. 

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In summary, both the markets are likely to have a positive outcome and almost a similar outcome against a very strong outperformance of Smids in the last three years. It looks like to be a very even keel kind of market. What one should avoid, in our view, are areas of exuberance, like public sector enterprises, which have low float and where valuations are no longer cheap. But otherwise, you know, I think that at this point of time, we are broadly looking for buying opportunities rather than looking at areas to avoid.

What is your view of fixed income, gold and realty?

So fixed income was looking to be exciting, but, you know, our view is that we are going into a pretty shallow rate cut cycle by RBI. We don't expect any sharp cuts by the RBI during the year, so expect a moderate return in the fixed income market. Real estate, rather than returns, we look at it as a sector for economic growth and overall economic activity. In the past decade, real estate was a headwind for growth because we had lower launches, high inventory and a shrinking real estate segment. In the last 3-4 years, that segment has become a tailwind to growth. And real estate cycles are long cycles, so we do expect that the real estate market will be buoyant and will be contributing towards economic growth. We don't have a formal view on gold, but if you look at heightened volatility in markets and also currencies, many central banks have been buying gold. Geopolitical tensions remain elevated, and it all makes for a good recipe for gold investors. But again, we don't have a view on gold.

Do you expect RBI to cut policy rate in February?

It's a very difficult call to make. Recent India CPI Inflation print, US bond yields, currency volatility make it a difficult decision. Our view, as I said earlier, if there is going to be a rate cut cycle, it's going to be a shadow cycle. Now the February call is difficult as Trump 2.0 can throw unexpected surprises in its very initial days and that can play spoilsport. However, if one goes by the 50 basis points CRR cut by RBI in the month of December, it’s likely that the central bank may still go ahead with a 25-basis-point rate cut in the February meeting, but it’s still a difficult call.

Our belief is that India's potential growth is closer to 7% and with right policies and measures, it can actually go beyond that.

Do you think six to 6.5% GDP growth will be the new normal, rather than 7% plus?

Yeah, we keep questioning whether India's growth is now likely to be at 7% or below given the 5.4% print that we saw in the previous quarter, and whether 6 or 6.5% is the new normal. One has to appreciate the recent growth in context of twin tightening, fiscal and monetary, and the recent elections impacting government spending trends. Our belief is that India's potential growth is closer to 7% and with right policies and measures, it can actually go beyond that. For the fiscal year 2026, that is an upside risk to market estimates. Market is anchored to a slightly lower growth expectation. We do note that the government spending is picking up, although as we noted earlier, it's going to take time to come back to full throttle. The rural recovery is likely to set in once the winter crop is harvested, and that impact will be felt more in FY26 from a consumption perspective. We do note that the government spending mix has been changing a little bit from capex to more welfare spending and that can be consumption supportive.

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But from a longer-term perspective, for us to achieve 7% and higher growth, we need our industrial and manufacturing sector to kick off. The private investment cycle has been this slow to kick off. There's a lot of dry powder in the form of bank capital, low leverage in corporate balance sheet and recent raising of capital by companies, further augmenting growth capital. There is also a low level of consumption from the rural economy in particular. There are a lot of positive triggers that can happen in India, but we also will need a little bit of support from global growth to return to 7% clip. As we speak, global growth is a bit uncertain. While there is expectation of a better growth in the in the US market, that’s going to be offset by weakness in growth in the Chinese economy. As long as global growth is a mixed bag, to achieve a growth above 7% and sustaining above 7% will be challenging. But in FY26, there's a strong possibility that growth may actually surprise a bit on the upside, as compared to what the market is expecting.

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