BoI MF sees export sectors de-rated if US deal not inked in next few months

Mint

15 hours ago

India's equity market has not yet fully priced in the impact of the 50% tariff announcement by the US, and is holding its nerves on hope of an agreement, says Alok Singh, chief investment officer at Bank of India Mutual Fund.
In an interview with Mint, Singh warns that the country's failure to reach a 'reasonable" agreement with the US in the next few months could lead to a de-rating of the export-heavy sectors that cater to the world's largest economy.
On the big picture, he says India may continue to see elevated valuations in Indian equities for some more time, with a gradual correction likely only if earnings growth falters for a sustained period.
Edited excerpts:
What are the triggers for the markets now?
Markets haven't been doing well primarily because earnings have been a bit of a concern, making valuations seem slightly expensive. That said, EPS (earnings per share) growth has been around 12-13%. But most of this has come from profit margin expansion and very less has come from the revenue growth, which the market doesn't like. Profit margins have a ceiling. Once you hit that, future EPS growth can only come from topline growth.
Revenue growth was struggling earlier due to lack of government spending, but things are now in repair mode. The government has taken measures like tax cuts and the RBI (Reserve Bank of India) has infused liquidity and reduced interest rates. The impact pf these actions usually sees a lag, so the second half of the year should see a demand pickup. If that happens, revenue growth will likely follow.
The government is also planning to implement a new pay commission for central government employees next year. Once that's formalized, spending patterns could improve, which should support revenue growth and in turn support markets.
Why have the markets not reacted to the 50% tariff announcement by the US?
We think that the market still has a hope of a trade deal in the near future. Therefore, it has not fully reacted to the 50% tariff announcement. If India doesn't achieve a reasonable deal in the next few months, then markets will derate businesses with a higher US exposure.
The main issue with the US is energy trade with Russia. What if India stops importing Russian oil?
Non-purchase of Russian oil by India will have an impact on global oil prices, and that will, in turn, push up inflation in India.
Do we see valuations in India's equity market correcting?
When you buy anything expensive, you consider three things: stability, growth, and return profile. India offers the best growth, and our market's ROE (return on equity) profile is second best after the US. In terms of macro stability, we are fiscally stable. With all the three things in place, we are supposed to trade at a premium. Can we sustain it? That's the key.
Growth has slowed, especially as private capex has been subdued. But this does not warrant an immediate de-rating in valuations. We may continue being expensive for some time. If we continue to falter for a long time, especially if revenue growth does not pick up, there might be some disappointments in the market.
What are companies saying about capex?
Capex is happening, but mostly brownfield and funded via internal accruals or equity, and not large greenfield projects. We are not seeing the big-bang announcements on capex; it is more like adding additional capacity to an existing project.
Domestic institutional investors (DIIs) have been buying consistently. Foreign institutional investors (FIIs) were buying since April, but they have been selling...
That's just secondary market data. Look at the total flows, including the primary market. FIIs have been participating actively in IPOs (initial public offerings) and QIPs (qualified institutional placements). We often ignore this. The overall flows aren't that bad. Like for the month of July, NSDL data showed a cumulative secondary market selling of ₹20,262.95 crore, which when combined with primary market buying of ₹13,759.86 crore resulted in net equity outflow of around ₹6,503 crore.
Why are primary markets more attractive for FIIs?
Better valuations, newer businesses, and attractive pricing. Some FIIs are booking profits in older investments and reallocating to primary market opportunities.
Why are we seeing bankers pricing IPOs at a lower valuation than the grey market, unlike last year?
Since January-February, the market and fund managers have become more reasonable in terms of valuation expectations. That's primarily because these are relatively unknown companies.
There has to be a premium for being a known entity versus an unknown one. If you're a known company, you've got better disclosures and a track record. Private companies have different disclosure norms and conduct, which makes them less transparent. So, if I'm buying into something unknown, I'd want a discount, and that's what the market is reflecting right now.
Which are the sectors you see outperforming hereon?
Banking and financials should do well. Retail banking, which was struggling because of NPAs (non-performing assets) could start doing well, as we see the NPA cycle bottoming out in the next one quarter. Discretionary consumption should pick up.
We like the power sector, as there is significant global capex happening in that space. Over time, the source of power generation has changed. It's moving from thermal to renewable. On the other side, we need high power generation for data centres, crypto miners and others. So the entire demand landscape is changing. The infrastructure that connects everything wasn't designed for this shift. That's why, over the last few quarters, we've seen a lot of global outages. These grid failures are happening because the high-voltage infrastructure isn't equipped for the new load patterns. That entire system now needs to undergo a transformation, which is driving the power story.
Any sectors you are avoiding?
Oil and Gas is one underweight. FMCG (fast-moving consumer goods) is another. In FMCG, we see demand but new-age brands and quick commerce platforms are eating into their growth. Brand loyalty isn't what it used to be. Distribution, once their moat, has been disrupted by e-commerce. Also, most products are well-penetrated in the majority of the pincodes. So there are no new pincodes to explore so there's limited scope for growth. Plus, smaller, agile players are chipping away at their market share.
How do you look for alpha in the midcap space?
Demerger is a big trend. Many conglomerates are breaking up into focused businesses—some well-established and decent-sized, which are eventually getting into the midcap space.
Also, new listings are mostly in the smallcaps or midcaps. So the entire midcap universe is expanding. The alpha generation base is widening.
What is your approach in periods of high volatility?
Volatility has to be there. If I'm getting money every day and someone is pulling out, that's how I'll be able to redeploy money when someone exits and new money comes in.
So, volatility, in a way, is good for the market. It allows the market to sustain over the long term. Redistribution, entries and exits become easier. If you look closely, when volatility is high, the market volumes are also high.