Samvat 2081 begins with Muhurat trade. The year for stock pickers?

After a strong year that saw stocks touch record highs, Samvat 2081 started on a positive note with stock indices ending in the green. However, market veterans have expressed caution on the path forward: don’t expect a repeat of Samvat 2080, conserve capital and limit your expectations.

The Nifty 50 and Sensex closed on a positive note during the Diwali Muhurat special trading session on Friday, rising 0.4 per cent each to 24,304.35 and 79,724.12 points respectively. During the year, the Nifty 50 index hit record highs in 78 out of 242 trading sessions, according to Capitaline data.

Experts said Samvat 2081 will be a stock picking market, highlighting the importance of careful selection in an environment where return expectations are likely to be more subdued compared to previous years.

Rahul Singh, chief investment officer of Tata Asset Management, said that in the future, “alpha generation will increasingly be defined by stock picking rather than sector picking.” He explained that strong macroeconomic fundamentals are currently offset by lower earnings forecasts. This, he says, could lead to a phase of consolidation where thematic trends fade away and a bottom-up approach takes over.

Right drain above the right sector

Gaurav Dua, senior vice president and head of capital markets strategy at Sharekan at BNP Paribas, agreed that picking the right stocks, not the right sector, will be key. “Even as the multi-year outlook for the Indian economy and markets continues to be positive, Samvat 2081 could see lower yields driven by global uncertainty and slower domestic income growth,” he warned.

Vetri Subramaniam, chief investment officer at UTI Asset Management Co., said: “The key point is that you have essentially borrowed some future earnings – that’s the reality. Keep this in mind if you plan to sell your position.”

Moreover, expecting to achieve earnings that exceed earnings growth from this starting point is a risky assumption, he added. “Your best forecast for profitability will likely be in line with earnings growth. However, given that valuations are currently high, there is a possibility that yields could fall below earnings growth if valuations begin to normalize,” he explained.

Taking a valuation-based approach, Vetri feels much more comfortable with large-cap stocks. In contrast, his comfort with mid- and small-cap companies is limited, largely because their valuations already factor in expected future growth.

Nilesh Shah, Managing Director, Kotak Mahindra AMC, emphasized that in equities, investors should prioritize quality over momentum, favor large-cap stocks over mid- and small-cap stocks, and focus on reasonable valuations over dear ones as we move forward.

Show of mid- and small-cap companies

When comparing the returns of Indian equities with other asset classes, gold returned 32% while silver gained 39% in Samvat 2080. The rupee fell 1% and the 10-year bond fell 5%. However, BSE mid-cap and small-cap companies were the top gainers, rising over 40%, according to Capitaline data.

Shah believes that repeating the results of the last five years will not be easy in the next five years. “So it’s important to temper our return expectations,” he said.

Vipul Bhowar, senior director at listed investment firm Waterfield Advisors, said inflation pressures, geopolitical uncertainty and the potential for a global economic slowdown could lead to further market correction. “In this context, investors should focus on capital preservation and expect modest returns from Samvat 2081.”

He believes sectors associated with domestic growth themes such as financials (especially insurance), consumption (including real estate ancillary sectors), energy (especially renewables) and healthcare are performing well.

Among all sectors, the best performers in the last samvat were Nifty PSE, Nifty Realty, Nifty Healthcare index, Nifty Pharma and Nifty Auto, which posted returns of 44-60%. In contrast, Nifty Media, Nifty Private Bank, Nifty FMCG, Nifty Bank and Nifty Financial Services were the top laggards.

Siddhartha Khemka, Head of Research and Asset Management, Motilal Oswal Financial Services, said, “Markets are moving towards defensive sectors to offset rising volatility due to various headwinds.”

Discretionary consumption is expected to benefit from rapid changes in consumer purchasing behavior, shifting from unorganized/local channels to organized ones. The ongoing festive season, coupled with a stronger-than-expected monsoon from July to September 2024, has led to a surge in rural consumption, serving as a short-term catalyst for higher economic activity.

In the healthcare sector, the domestic business remains strong with niche product launches. Additionally, financial sector valuations remain favorable and as growth visibility improves in the coming quarters, Khemka expects the sector to outperform expectations. “Besides these sectors, niche sectors such as jewellery, electronics manufacturing, electric vehicles, renewable energy, e-commerce and digital technology are expected to witness significant growth,” Khemka said.

Amid a cycle of rate cuts

Samvat 2081 begins with the start of a global rate cutting cycle. Given the likelihood of further cuts, investor sentiment is expected to remain optimistic.

“In response, the RBI has moved to a ‘neutral’ stance, hinting at a potential rate cut in the next 6-9 months. We expect one to two rate cuts by RBI in Samvat 2081 depending on inflation and growth dynamics,” Yes Securities (India) said in a report dated October 28.

“Although the outflow of foreign institutional investors has now peaked, the share of FII (foreign institutional investors) assets as a percentage of market capitalization is far below the prosperous levels of the 2003-2007 cycle,” the report highlights. “We believe lower risk-free rates and a stable Indian rupee will attract significant foreign investment inflows, especially given limited opportunities in sluggish markets such as China. It is clear that India is in a long-term structural bull market, marked by manageable corrections along the way.”

According to NSDL, FIIs purchased Indian shares worth ₹82,414 crores while domestic institutional investors (DIIs) purchased ₹4,62,069 crore shares from the beginning of Samvat 2080 to October 31, 2024.

All things considered, the US elections will be a crucial event for investors to watch in the new Samvat. Experts say market returns are primarily determined by the overall economic landscape and the policies of the ruling party. Thus, understanding the positions of each candidate or party is important to assess their potential impact on various sectors.

The 2024 US election campaign has entered its final week, with elections scheduled for November 5th. Opinion polls are extremely accurate, making it difficult to predict the outcome.

“The Democratic nominee, Vice President Kamala Harris, and the Republican nominee, former President Donald Trump, are neck-and-neck in both national and key state voter polls,” JM Financial Institutional Securities said in a report from October 31st. State-level voting is the most important because the choice of president is determined by the results of the Electoral College. In most cases, the candidate who wins a state receives all of that state’s electoral votes, the document says.