Informist, Thursday, Jul 25, 2024

By Apoorva Choubey

MUMBAI – The trend seen in Indian equities so far this week suggests that investors, domestic institutions in particular, could keep buying into dips in the market, as the long-term outlook for domestic shares remains intact, according to market watchers. The Nifty 50 has managed to recoup nearly all losses made intraday and end largely unchanged during every one of three sessions Tuesday onwards.

After Finance Minister Nirmala Sitharaman announced a hike in capital gains tax and increase in securities transaction tax for derivatives, foreign institutional and some other investors have booked profits in Indian equities. But domestic institutional investors seem to have picked up some of these shares as they are now looking beyond the Budget and aligning their portfolios in accordance with corporate earnings and global developments, said analysts.

With the top 100 active equity funds holding 3.2% of their assets in cash, any correction in the market is likely to see deployment of cash, brokerage Elara Securities said in a report on Wednesday. Hereon, interest rate cuts and earnings growth should become key drivers for the market, the brokerage said.

Since the presentation of the Budget on Tuesday, domestic institutional investors have net bought Indian shares worth nearly 70 bln rupees, while foreign fund managers have net sold equities amounting to over 107 bln rupees, on a provisional basis. The Nifty has fallen a little over 100 points, or less than 0.5%, since the Budget was announced, while the rupee has hit fresh lifetime lows against the dollar this week.

On the whole, analysts opine that the Budget announcements on capital gains tax and securities transaction tax would only have a marginal impact, as of now, and will not hurt the outlook for Indian equities. The Budget was seen reinforcing the growth prospects of the Indian economy, given its emphasis, among other things, on job creation, stoking demand, support for smaller enterprises, and continued focus on scaling up manufacturing and infrastructure creation.

Goldman Sachs Research has retained its positive stance on Indian equities, given the resilience in the economy and strong corporate earnings growth delivery, which the brokerage believes will help domestic stocks sustain their relative appeal to other markets, despite elevated valuations. "We continue to favour domestic sectors, including rural infrastructure, energy security, tourism and housing that align well with the measures announced in the Budget," the brokerage said in a note.

"Domestic funds don't have a choice but to deploy the inflows in their schemes, so as such, the market may consolidate a bit as FPIs are selling, but it will sustain the larger uptrend with the help of sectors that are not that expensive," the head of equity fund management at a large mutual fund house said. Several experts believe the sectors that drive the rally in shares in the coming months could be different than the ones that had piloted gains so far this year.

Even though capital expenditure allocation was retained, the initial euphoria in sectors such as aerospace and defence, railways, infrastructure, and shipbuilding is expected to temper as focus shifts from enthusiasm to execution, Elara Securities said. Thus, several experts are now turning overweight on sectors such as fast moving consumer goods, agrochemicals, two-wheeler makers, and other consumption-themed plays, over industrials and government capital expenditure-related themes.

Nuvama Wealth Management also agreed with the view that corporate earnings are the key drivers here on, but warned that momentum is fading. "This (earnings momentum slowdown) warrants a quality bias, and we prefer consumption over capex," the brokerage said. It is bullish on private banks, insurance, consumer, information technology, pharmaceutical, and telecom sectors while being bearish on industrials, metals and state-owned companies.

Another trend that could play out in coming months is that share buybacks by a few companies may reduce, as income from them will be taxed at the hands of recipients, similar to dividends. Currently, buybacks are taxed as additional income tax in the hands of the company.

"The tax on buyback could adversely affect payouts and, at the margin, hurt return ratios and valuations of some high-cash generators," said Emkay Global Financial Services. Therefore, some companies could resort to giving dividends in place of buybacks, but on the whole, a large change in the trend of buybacks is not expected.

Emkay Global is cautious on the market as the earnings season has not been encouraging as topline growth remains moderate and margin tailwinds are petering out, at a time when valuations are expensive and interest rate cuts seem a quarter or two away. The Nifty 50 is currently valued at 21 times the price to earnings multiples of the one-year forward earnings estimates of its constituents.

On being asked for a level for the index for the end of the year, several analysts were not confident of the likely movement in shares, due to uncertainties such as US elections, interest rate cuts by the Federal Reserve, trade related developments and their impact. The Nifty 50 closed at 24406.10 points, largely unchanged from the previous close, after having opened 1% lower. End

US$1 = 83.6975 rupees

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

With inputs from Anshul Choudhary

Edited by Aditya Sakorkar

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