How to build a portfolio after Maharashtra election results? Explains Feroz Aziz of Anand Rathi Wealth

Indian stock markets have seen a correction in the last two months with the Nifty50, Nifty Midcap 100 and Nifty Smallcap 100 indices falling by around 8-9% till November 22. Several factors such as moderate corporate earnings, relentless selling by foreign institutional investors (FIIs), geopolitical tensions and strengthening dollar index post Donald Trump’s victory weighed on market sentiment. Concerns surrounding the Maharashtra elections have further contributed to market volatility in the recent past. So, can investors build a portfolio in this market? In an interaction with Business Today, Feroz Aziz, Deputy CEO, Anand Rathi Wealth, shared his thoughts. Edited excerpts:

Question: How do you see domestic equity markets over the next 12 months?

Aziz: India’s September 2024 quarterly earnings season broadly met market expectations, especially for the Nifty 50, with consolidated sales growth of 4.3% year-on-year and profit after tax up 3.5%, in line with consensus. EPS growth of 9.4% for the Nifty 50 and 7.8% for the Nifty 100 contrasted with subdued performance in the mid- and small-cap segments, reflecting robust growth therein. At present, valuations appear reasonable and are not causing major concern. We estimate the fair value of Nifty50 to be 24,782, Nifty Midcap 150 to be 20,069 and Nifty Smallcap 250 to be 17,257.

Question. Which sectors can give investors decent returns from now on? Why?

Aziz: We are positive on consumer durables and FMEG as demand for high-value products with minimal inventory levels remains strong, supporting continued growth in H2FY25. We are also optimistic about the banking sector. Strong domestic fund inflows and a robust credit expansion cycle are fueling the sector’s consistent growth. Treasury earnings are expected to remain moderate, supported by stable Treasury rates, which will boost overall profitability. Stable asset quality continues to support robust lending growth and healthy profitability, positioning the banking sector as a strong growth area amid global volatility. Investors may also want to consider the automobile sector. Growth in two-wheeler sales is the main driver, supported by expanding rural markets, while premiumization of passenger vehicles is boosting revenues. Expanding product ranges, rising prices and demand for high-end models are supporting long-term growth in the auto sector.

Question. What should be the right strategy to make money after the Maharashtra election results?

Aziz: In the medium to long term, Indian equities are expected to deliver an average annual return of 11-13%. Investors should focus on building an asset allocation strategy with an 80:20 equity-to-debt ratio to help avoid volatility over the long term, as these asset classes have low correlation. Equity mutual funds on average return an additional 2-3% over the Nifty 50, resulting in returns of 13-15%. We expect growth of 11-12% in the large-cap segments and around 20% in the mid- and small-cap segments. A balanced approach, with 55% of the shares held by large-cap companies and the rest by mid- and small-cap companies, can help in portfolio diversification.

For debt products, arbitrage funds can offer equity-like taxation and debt-like returns. If necessary, the portfolio’s asset allocation strategy should be reviewed and rebalanced.

Question. What does Donald Trump’s victory in the US presidential election mean for Indian investors?

Aziz: The US elections are over and Donald Trump is back as US President, this could give a big boost to the American economy. Trump’s approach to boosting GDP growth typically involves bold trade deals and using tariffs as leverage to get better terms for American industry. On the fiscal side, Trump could cut international spending and welfare programs, channeling those resources into U.S. infrastructure—a move that could create jobs and grow the economy. Cuts in government spending could also reduce the fiscal deficit, helping to keep inflation below market expectations and setting the stage for potential further interest rate cuts.

Stricter immigration policies and lower taxes could also mean more job openings and higher wages for American workers, leading to higher consumer spending. Overall, these policies could support strong corporate profits, increasing shareholder value and investment.

For strategic partners like India, this could mean more stable trade relations, new growth opportunities and closer cooperation in areas such as technology and manufacturing.

Question. How could the rupee fall further impact market sentiment?

Aziz: A weaker rupee makes imports more expensive, increasing production costs for companies in sectors such as oil and gas, chemicals, pharmaceuticals, electronics, etc. This in turn affects corporate profit margins to a certain extent. More expensive imports may partly impact domestic inflation. FIIs may also exit the game due to fear of currency loss, which may partially impact the market. On the other hand, exports become more attractive and may benefit from this scenario.

Question: What do you think about the FMCG sector?

Aziz: Demand increased sequentially in Q2 FY25, but heavy rains and floods reduced out-of-home consumption, especially in the beverage segment. Rising commodity prices are expected to further increase prices in the second half of FY25. Many urban distributors (general trade) have seen inventory growth and trade credit expansion as competition from local players intensifies. While alternative channels reported double-digit growth, traditional channels performed moderately.

Inflationary trends have been observed for some commodities such as vegetable oil, coffee, palm oil, copra, etc. This may result in gross margin pressure for some companies while remaining favorable for others. EBITDA margins should grow more slowly compared to last year as companies focus on investing in brands to increase volumes. Despite these challenges, we remain optimistic about rural recovery, supported by good rainfall, festival demand and government initiatives.

 

Question: When do you think FIIs will come back?

Aziz: Both stimulus policies and elections have partly weighed on Indian markets, but India remains resilient even as FII inflows continue to shift towards China, with DII inflows peaking in the last month at Rs 1,07,255 crore as against last 6 months DII. tributaries Despite the recent capital inflows into the Chinese market, FIIs are believed to be in the final stages of the sell-off in Indian markets and we expect the outflow pressure to ease soon.

Question: What factors will influence the Indian stock market in the future?

Aziz: Indian stock markets are poised for sustained growth, supported by strong economic fundamentals. With real GDP expected to grow 6-8% over the next five years, India will remain the fastest-growing major economy. Inflation appears to be under control within the RBI’s target range, creating scope for a potential rate cut in the near future. On the financial side, tax collections were strong, the deficit is under control and spending growth is disciplined – all indicating a strong basis for market confidence.

On top of that, falling bond yields (likely to fall below 7% as inflation declines) could provide a nice boost to stock prices. Historically, lower yields have meant higher stock multiples, and that trend looks set to continue. Valuations are reasonable at the moment, with both large- and small-cap stocks offering attractive opportunities. Earnings growth for Nifty 50, midcap and smallcap companies in FY25-26 is expected to be in the range of 11-22%, which means the market has a lot to look forward to in the coming years.

Question. What are the key issues that could further weaken market sentiment?

Aziz: Continued higher inflation above RBI’s target could keep interest rates higher. A weakening rupee in the near future may impact returns and thus make FII investors unattractive. A slowdown in global trade could impact India’s exports and external balance, as well as the current account deficit.