Madanagopal Ramu is the Head – Equity and Fund Manager at Sundaram Alternate Assets
“We don’t see any headwinds for the equity markets at this point, except for over expectation in earnings growth numbers in a few pockets of the mid and small cap space,” Madanagopal Ramu, head of equity and fund manager at Sundaram Alternate Assets, says in an interview to Moneycontrol. “If we can avoid those segments, then the risk reward is favourable for the market,” he says.
Ramu believes falling inflation, reducing interest rates and 6-7 percent economic growth rate make the best narrative for growth cyclicals like financials and consumption.
Valuations in financials and consumption segments are not expensive, says the finance expert, seasoned for over 14 years in the Indian markets. Excerpts from the interview:
Do you think all the positives have been fully priced in by the market including expected fed funds rate cuts in 2024?
Looking at the growth story of India supported by investments in manufacturing and services, we still see many opportunities to make reasonable returns for investors. Might be the quick money that was made in the market in the last two years due to flows, particularly in the mid & small cap space may moderate, but if investors can stay put for three years, there are many investment opportunities to make decent returns.
Does it mean the risks of inflation and US recession are getting reduced considerably?
The Fed has advanced Christmas celebrations for markets by announcing rate cut possibilities in 2024. While we always believed that rate cut would happen by the end of 2024, US economic data was still not supportive of an immediate rate cut. We don’t know whether the Fed is seeing some early indicators which made them change the stance in a short period.
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But a rate cut scenario with 6-7 percent growth in India is a great news. In 2023, India delivered higher GDP growth rate despite high inflation and interest rates, and it was supported by growth in manufacturing and infrastructure spending. Consumption was weak in 2023. In 2024 with inflation being moderate and interest rates may be cut in H2, we expect private consumption to come back strongly leading to higher capacity utilization across sectors and capex momentum. We therefore see a good 2-3 years of sustained economic momentum to be continue in India.
Do you expect a pick-up in investment cycle in the coming year?
Capacity utilisation levels for many sectors have already crossed 80 percent, therefore, if consumption picks up momentum supported by rate cuts and lower inflation, then investment momentum in capex would continue further.
In addition, we expect the government to prioritise infrastructure spending in power, railway and defence sector over the next five years. Together we expect over the next five years, investment rate in India as a percent of GDP to be materially higher compared to the last decade.
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How do you summarise the year 2023 for the equity markets?
This was a good year for the mid and small cap segment, which rallied almost 40 percent on-year compared to 15 percent for largecaps. We expect, in 2024, markets will deliver double-digit returns supported by earnings and valuations but the gap between large and mid/small performance may narrow down.
Valuations are still not expensive in many pockets, so the investor needs to be selective. Flows are the biggest risk to this call. But, given the high growth scenario in India, FII flows should not disappoint.
Do you see the equity market rally continuing next year too? Do you see any headwinds?
We don’t see any headwinds at this point except for over expectation in earnings growth numbers in few pockets of the mid and small cap space. So, if we can avoid those segments, then the risk reward is favourable for the market.
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Which are the top three themes on your radar for 2024 and why?
Falling inflation, reducing interest rates and 6-7 percent economic growth rate is the best narrative for growth cyclicals like financials and consumption. Within the BFSI space, growth will further accelerate in companies playing financial inclusiveness story, so NBFCs look interesting.
In Consumption, discretionary spending moderated in 2023 and can recover strongly in 2024. Valuations in both these segments are not expensive currently. Manufacturing will remain an interesting opportunity at every correction.
Do you expect the third quarter earnings (Q3FY24) season starting next month to be strong?
Formalization of the economy and the manufacturing upcycle will help corporate earnings to be stronger for the next 5 years. We expect around 10-12 percent earnings growth for largecaps and similar returns as well. There may not be large deviations within sectors in largecaps. But in mid and small caps, earnings growth will mostly be driven by very high growth in certain pockets.
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If you remain invested in those segments, then returns can be meaningfully higher than overall pack. In the last 10 years, mid and small cap companies which have seen earnings growth of 20 percent plus (forming 10 percent of investible universe), have delivered more than 10x return.
Compared to this, companies with less than 10 percent earnings growth during the same period have delivered just 3x return. So, if you have invested 10 years ago Rs 1 crore in the first high growth bucket, you would have made Rs 10 crore now and importantly you would have made Rs 7 crore additional money by not touching the low growth earnings businesses.
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