Markets likely to trend and hit new highs in H2; 3 themes to deliver multi-year returns: Nitin Raheja

Economic Times

27-05-2025

Nitin Raheja, Head - Discretionary Equities, Julius Baer Wealth Advisors, says a fall in inflation which has impacted the purchasing power of the middle class as well as falling interest rates should lead to a revival in the bottom K of consumption towards the second half of this year. So, combined with the rural as well as urban consumption, the bottom K, which has been the struggling part of the economy post Covid, should make a comeback and that should have a big impact.
Raheja says the broader consumption story is a compounding story and should come back and do well over the next few years. The manufacturing theme is going to play itself out and investments in EMS should continue to deliver. These are multi-year themes that will deliver returns over periods of time.
Indian markets are holding up very well because from the March and April lows and we have already gained almost 13% on the index front. The big question is, are Indian markets back in form or are again frothy, given the runup in the mid and small end of the market?
Nitin Raheja: It has been an absolutely unprecedented rally which started post the announcement of the ceasefire. This also got to do with the fact that dollar has been in a structurally weak phase which has seen the rupee being stronger relative to the dollar and that has meant that foreigners have actually put in money and that is one big change and a differentiating thing that we have seen in the last month, and more so post the ceasefire. That has driven up the markets. It has been a hugely liquidity driven rally.
Having said that, some of the concerns that resulted in the correction that we saw post October had to do with earnings and the slowing down of earnings and also a tempering of GDP growth expectations. They remain very much in place. What we saw post September was when there was disappointment as far as earnings were concerned. Analysts went the other way in terms of their expectations and as December and March numbers came, they were not as bad as expected. So, we have once again seen a little bit of re-rating. I continue to believe that in the short term, valuations and slowing GDP growth will act as an overhang and we are in a time correction zone wherein you will see the markets trade within a range as such, maybe towards the upper end of the range considering the liquidity flows, but over a longer period of time, post the kind of monsoons that is being expected and was being talked about earlier in the programme, also with the festival season, we should see markets trend and hit new highs towards the second half.
Monsoon has arrived earlier this year and there is going to be an impact of that. Could you help us understand where do you see the sectoral impact especially in the FMCG, agri inputs, and rural focused stocks?
Nitin Raheja: Rural is one of the key beneficiaries. Already the feedback that is coming about is from a perspective. A) Of course, there has been this whole hike in MSP over the last few years plus with monsoons being good, even last year and this year, you should see rural start to come back dramatically and that would have impact as far as FMCG and even some of the consumer durable plays or as such. But against that we would also see two other things that have taken place. One is the changes that we had as far as tax is concerned especially for the lower middle class wherein up to 12 lakhs you will land up saving on tax and so on and so forth.
A fall in inflation which has impacted the purchasing power of the middle class as well as falling interest rates should also lead to a revival in the bottom K of consumption towards the second half of this year. So, combined with the rural as well as urban consumption, the bottom K, which has been the struggling part of the economy post Covid should revive and that can have a big impact. The last time we connected, you used to like some of the themes within the broader market like garments, auto ancillary, and even EMS as a play. Give us the latest on these themes. Do you continue to be bullish on any new additions in your latest theme or sector-wise view if you want to share with us which is looking interesting to you right now?
Nitin Raheja: Broadly from a long-term structural growth play perspective, we continue to like the consumption theme which is the premiumization of consumption. As we are moving our per capita GDP from $2,500 to say $3,000 in the next two years given these growth rates, we are going to see consumption go up and premiumization of consumption which is already visible whether you see premium automobiles, premium apparels, premium real estate, travel, and so on and so forth.That will continue and because the theme is resilient relatively to inflation and interest rates, but the broader consumption story is a compounding story that should come back and that should do well over the next few years. We think the manufacturing theme in India is going to play itself out and we are seeing investments in EMS which should continue to deliver. These are multi-year themes and will probably deliver returns over periods of time.
So, the consumption story is coming back very soon. Apart from that, I want to get your view on the earnings front, like you were just mentioning in the beginning. The last time we spoke you had said the earnings slowdown will take a couple of quarters to improve. Now, Q4 earnings are almost over. What are your thoughts there and in which particular sectors do you feel improvement has started on a steady note?
Nitin Raheja: If you look at the earnings that have come out, there has been no clear sectoral trend. Within sectors, we have seen some businesses depending on the business models do better. But across sectors, we have not seen structural earnings growth, like premiumization of consumption has shown itself. We are seeing the hotel industry deliver good numbers. We have seen airlines deliver good numbers. So, travel has been one secular theme that we have seen among all of this lot. But otherwise, if we were to scan through beyond premiumization, it has actually been very stock specific.
Even in banking and financial services, the larger banks do far better than the smaller banks and the regional banks. We have seen NBFCs do better and within NBFCs, we have seen a certain pack, especially the larger NBFCs do better because the ability to raise capital in a tight scenario that prevailed over the six months gave the large guys an advantage. Now that liquidity is surplus and we should see the small banks and the smaller NBFCs starting to come back.
Your market outlook is that in the second half the markets are expected to do a lot better than the first half. Give us some sense what factors will the market look forward to? Is it just the better earnings outlook or rather what has been happening in the global macro setup is also expected to stabilise a bit? What cues will the markets be looking forward to in the second half and which sectors can participate the most?
Nitin Raheja: When you look at India as a market, 57% of our GDP comprises domestic consumption and so consumption doing well is a very important and essential part and that is supplemented by capital expenditure or infrastructure spending. If you look at these two buckets from the economic perspective, if consumption comes back, you should see the economic growth being very strong and resilient. That being in place, we should start seeing corporate earnings starting to show up out there. So, in my own view, the fact that inflation has turned benign which has enabled interest rate cuts, which has enabled the central bank to flood the market with liquidity is all laying the grounds for the economy to come back. In light of this, the reason I say consumption first is because that is more domestic-oriented. When we look at manufacturing or infrastructure and capex plays, that is being led by to some extent global uncertainty and that could have some impact in terms of what allocations are done. We have not really seen private capex come back in a big way. Even the capex plays that we have seen come back are more in the nature of power which is internal. So, whether it is transmission lines or renewable energy that is again internal, what is happening in India is largely going to determine India's growth going ahead. In that sense, we are relatively insulated from global plays and with more clarity on tariffs coming about, hopefully in the next few months we should also see more clarity in terms of global plays coming. My own belief is a good monsoon, a good festival season driven by consumption should be the driver in place.
I want to get your specific view on the auto space and within that segment the two wheelers and tractor space, like you just said because of the early onset of the monsoon, we could have demand recovery coming in. You are bullish on the consumption story. So, what is your outlook on this space especially given the kind of numbers we have seen in quarter four and sales numbers that have sort of remained a mixed trend.
Nitin Raheja: The auto space is going to be driven by model accretion into each one's portfolio and we have seen that whenever you have had a new model accretion phase, companies start to do well as such. Two-wheelers as a space should come back and contrary to what a lot of people believe, that should be the absolute bottom end. Two-wheelers, given the aspirational element, we are even seeing in the semi-urban areas, demand for higher-end two-wheelers making a comeback. Tractors should continue to do well. It has had very strong growth over the last one year and we are optimistic on that part of the segment market also.