“This involves reallocating investment from overvalued sectors to those with more attractive valuations. For example, while IT and Financial Services have seen significant run-ups, sectors such as Pharmaceuticals, Infrastructure and Energy still offer attractive entry points given their growth potential and alignment with India’s economic development,” he says.
Edited excerpts from a chat:Given the valuations that Dalal Street is trading at and the fantastic returns that investors have achieved in the last few years, how bullish are you on India?
India’s stock market has been a global outperformer, with the Nifty 50 delivering a stupendous return of 40.9% over the past year. However, this has also led to stretched valuations, necessitating a more nuanced approach to investing and trading on Dalal Street.
Despite the high valuations, India’s macroeconomic fundamentals remain robust, driven by strong domestic consumption, public infrastructure spending and a robust financial sector. The projected GDP growth of 6.5% for FY2025 supports the bullish outlook, although investors should now focus on companies with strong earnings visibility and sectors aligned with India’s long-term growth trajectory.
Given the high valuations, sector rotation is an effective strategy. This involves redistributing investment from overvalued sectors to those with more attractive valuations. For example, while IT and financial services have seen significant surges, sectors such as pharmaceuticals, infrastructure and energy still offer attractive entry points due to their growth potential and alignment with India’s economic development.
Which pockets of the listed market are you looking at or investing in?
In this environment, a focused approach is essential. Infrastructure remains a key area of ​​interest, supported by government initiatives such as the National Infrastructure Pipeline (NIP) and the Gati Shakti initiative. These projects are expected to mobilize over USD 1.5 trillion by 2025, providing significant opportunities for companies such as Larsen & Toubro (L&T), which are well positioned to benefit from this infrastructure push.
The financial services sector, especially private banks and NBFCs, also offers attractive opportunities. HDFC Bank and ICICI Bank are prime examples benefiting from rising credit demand and improved asset quality. In addition, the consumer sector, driven by India’s growing middle class, presents compelling opportunities in grocery, retail and e-commerce.
For traders, momentum trading in high-growth stocks such as Tata Consultancy Services (TCS) and Infosys in IT and HDFC Bank in financial services can be particularly effective. These stocks have consistent earnings growth and strong market leadership, making them ideal for momentum strategies.
A recent survey of global fund managers by BofA found that most have shifted their preference from infrastructure to consumption themes in India. What about you?
The BofA survey reveals a broader global trend to capitalize on India’s consumption-led growth story. While this shift is understandable given India’s demographic dividend and growing middle class, it is critical not to overlook the infrastructure sector. Despite the tilt towards consumption, infrastructure investment remains the bedrock of India’s long-term growth.
A balanced approach that includes both consumption and infrastructure sectors is prudent. Consumer-driven sectors, particularly in retail and e-commerce, offer near-term growth, while infrastructure remains the backbone of sustainable economic expansion. Companies such as Divi’s Laboratories in pharmaceuticals and L&T in infrastructure are examples of how diversification across these sectors can provide both stability and growth.
Recently, fresh allegations made by Hindenburg in the Adani controversy made headlines. As a foreign investor, do you get worried after reading such reports, or do you think it was much ado about nothing?
For foreign investors, the key is to focus on the fundamentals. The Adani group, despite the controversies, remains a significant player in sectors critical to India’s growth, such as infrastructure and energy. The recovery in market capitalization (from the lows of last year) suggests that the market is starting to look past the controversy and focus on the long-term potential of these assets.
Investing in Adani shares should be part of a diversified portfolio strategy that leverages the group’s strong market positions, particularly in sectors that align with India’s broader economic goals.
Is you invested in Adani shares or looking to invest?
Investing in Adani shares is consistent with a long-term strategy focused on India’s infrastructure and energy needs. The group’s resilience, as demonstrated by the rebound in market capitalization from Rs 10 lakh crore to around Rs 18.5 lakh crore, indicates strong underlying fundamentals.
For traders, using options strategies such as covered calls on Adani shares can generate additional income while providing protection against downside conditions. This is especially useful given the volatility around the group. In addition, a protective sell strategy can hedge against adverse price movements, minimizing potential losses while maintaining upside potential.
Recently listed startups like Ola Electric, Unicommerce and Firstcry have received a good response on Dalal Street. What clicks now? In the past there was a lot of disdain for new-age companies?
The market’s warming to new-age companies such as Ola Electric, Unicommerce and Firstcry reflects a significant shift in investor sentiment. These companies are tapping into high-growth sectors such as electric cars and e-commerce, which are expected to grow significantly in the coming years.
For traders, momentum trading these stocks can be particularly effective as they continue to exhibit strong price trends. In addition, pairs trading — going long on one stock while shorting another within the same sector — can benefit from the relative performance. This strategy mitigates sector-wide risks while allowing traders to profit from individual stock movements.
FIIs have pulled out money incessantly from Dalal Street ever since capital gains tax was raised in the Budget. How much of a concern is the tax hike for investors?
The increase in capital gains tax has led to significant FII outflows, with over $3 billion pulled out of Indian equities in the first half of 2024. This has increased volatility on Dalal Street, especially in sectors sensitive to foreign investment.
However, it is important to consider the wider context. Although the tax hike is a concern, India’s economic fundamentals remain strong and the long-term growth prospects of its stock markets continue to attract global investors. Diversifying into other asset classes, such as corporate bonds or gold, can provide stability and increase returns, especially in the current low interest rate environment.
In conclusion, while the Indian market faces challenges, it remains a compelling investment destination, especially for those with a long-term perspective. Leveraging advanced trading strategies such as sector rotation, options trading and pair trading, coupled with a focus on outstanding companies, will enable investors to navigate the complexities of Dalal Street effectively.