Recently, PMS Bazaar released a magazine showcasing a series of articles authored by diverse fund managers. n this blog, we've selected and gathered excerpts from an Exclusive Interview with Mr. Madanagopal Ramu, Head of Equities & Fund Manager at Sundaram Alternates, featured in the Magazine, covering his perspective and insights into the current market rally and its distinctive characteristics.

A Different Shade of Market Rally: Unraveling the Factors

Mr. Ramu emphasized that each market rally is fueled by its underlying causes. He pointed out that the post-COVID market rally in India is primarily shaped by three pivotal factors:

• Foreign Portfolio Investor (FPI) Flows in 2020: A significant surge in FPI flows was witnessed in 2020, attributed to the substantial liquidity infusion provided by developed economies to aid global economic recovery in the aftermath of the pandemic.

• Earnings Surge in the Formal Sector: India's formal sector experienced a boost in earnings due to global supply chain disruptions. This led to a surge in corporate cash profits during FY21 and FY22.

• The Shift in Global Allocations towards India: The economic slowdown in China prompted global funds to allocate more resources to India in 2022. This shift in allocation, combined with the other two factors, contributed to the market's upward trajectory.

Though interconnected, Mr. Ramu noted that these factors have distinct roles to play in the ongoing rally. The first factor significantly impacted India's valuations, especially in the mid and small-cap segments. While the second and third factors provided continuous support to valuations, they also played a role in mitigating the impact of volatile FPI flows over the last year.

The Duration and Dynamics of the Rally

Mr. Ramu projected that three factors contributing to the rally are still in play, albeit at varying rates. Although likely to be more focused than in the last two years, earnings growth is anticipated to outperform pre-COVID levels. Notably, the manufacturing sector's support and steady growth in the services sector have enhanced earnings visibility.

As for the global allocation toward India, Mr. Ramu underscored that the ongoing uncertainty in China's recovery trajectory continues to channel investments toward India. He pointed out that while broad-based FPI flows might not be as pronounced as in the post-COVID period, targeted sectors and stocks could benefit from these investments.

A notable shift in investment focus was highlighted by Mr. Ramu, who suggested that quality is set to regain prominence over value in the coming years. The increase in valuations within the mid and small-cap space has diminished the prevalence of low PE sectors and stocks unless a substantial earnings visibility issue arises.

Key Sectors and Potential Risks on the Radar

Mr. Ramu shared insights into the sectors that have piqued his interest, identifying four primary themes as his focus:

• Financial Inclusiveness: This theme capitalizes on growth opportunities within retail credit penetration and the transition from unorganized to organized lending.

• Consumer "Czars": Mr. Ramu expressed positivity about urban discretionary consumption growth, particularly in small-ticket spending. He anticipated robust growth driven by healthy urban job growth and rural consumption recovery in 2023.

• Phygital "Bluechips": This theme involves companies that stand to benefit from India's growing online penetration across various sectors.

• Manufacturing Maestros: Mr. Ramu believes that sectors such as electronics, chemicals, auto, and engineered goods will profit from import substitution driven by the Production Linked Incentive (PLI) scheme, cost-competitive exports, and focused government infrastructure spending.

When queried about challenges for the market, Mr. Ramu highlighted the potential impact of sticky inflation and prolonged high-interest rates, which could lead to economic slowdowns in both developed and developing nations. He also underscored the significance of global macroeconomic trends, specifically mentioning the risk associated with oil price levels and the potential impact of El Nino on rural consumption.

Navigating the Valuation Landscape

Addressing concerns about market valuations, Mr. Ramu provided a comprehensive analysis. He acknowledged the bounce-back of the Nifty 50 index from March lows, which has led to a period of consolidation over the past 20 months. Despite this, earnings have grown over 25% over the last two years. This perspective led him to conclude that the markets are currently trading at an 18x FY25 PE and a 20x FY24 PE, with a 25% discount factored in due to enhanced earnings visibility compared to 2018 and 2019.

Considering favorable macroeconomic conditions and controlled inflation, Mr. Ramu expressed optimism about the market's potential to deliver favorable returns in the next two years. He identified positive triggers, such as potential rate cuts from the Federal Reserve, that could further bolster this momentum.

Looking Forward: Challenges and Opportunities

Mr. Ramu raised concerns about the impact of persistent inflation and high-interest rates on both developed and developing economies. This, he emphasized, could potentially trigger an economic slowdown in the latter part of FY24. Furthermore, the hawkish commentary from the Federal Reserve in June heightened the likelihood of interest rate hikes, an aspect to closely monitor.

Earnings and Future Prospects

When discussing the prospects of the Q1 earnings season, Mr. Ramu painted an optimistic picture. He pointed out that several macro indicators, including monsoon performance, credit growth, GST collection, e-way bill data, and the Naukri job index, were aligned with expectations. The rural market exhibited signs of recovery in Q1, while urban consumption indicated some moderation, likely due to a robust base.

Mr. Ramu suggested that long-term structural themes like retail banking, manufacturing, consumer discretionary spending, and digitization are poised for growth despite short-term challenges. However, he highlighted potential growth hurdles in generic Pharma, FMCG, Metals, and IT sectors. He expressed confidence in export-oriented sectors focused on specialty chemicals, given their consistent growth support from new projects.

If you find this blog informative and look forward to reading the Exclusive Interview of Mr. Madanagopal Ramu, then check out our July Edition Special Edition Magazine – Click HERE.