Mkts resilient, H2 growth likely to be led by consumption

Sumit Bhatnagar, Fund Manager at LIC MF, expects a minor time correction in the market but does not foresee major price declines. He anticipates a pickup in corporate earnings, driven by consumption and increased capex activity, benefiting sectors like NBFCs, cement, and FMCG.

ET Now: Looking at all of these uncertainties, we have a lot of global factors which are playing around, domestically we have the earning season which was not that a great set, at least the first half and now we have the inflation print, the wholesale price index, WPI prints coming in, all of these advocates one fact is that the markets are resilient. What is your take on the market at present?

Sumit Bhatnagar:
The global economy is continuing to throw curveballs at us, and it would continue till the time Donald Trump is in the office. So, what we need to focus on is the domestic economy, and that is where our focus is. If you look at the domestic economy, we are doing reasonably well. The fiscal and monetary measures taken by the RBI and the central government should help in improvement in your growth trajectory in the second half. We expect all the liquidity measures, the rate cut measures that the government has taken to play through your economy in the next two to three months, and we should see some bit of improvement both at the GDP growth level and at the corporate earnings level in the second half. Regarding this quarter's numbers, while they maybe broadly in line with expectation, the key takeaway for us is that the earning downgrade cycle or the pace of earnings downgrade is getting slower and probably we are in a bottom quarter or maybe the Q2 can be the bottom quarter for earning downgrade per se and from here on we expect the earnings to pick up gradually. As far as valuations are concerned, our markets are still fairly valued, whether it is your headline indices or if you compare it on a yield gap basis or if you compare the premium that we have enjoyed vis-à-vis other emerging markets, which are broadly in line with the long-term averages. So, you are in a situation where valuations are reasonable and the earnings trajectory is set to improve.

ET Now: You mentioned earnings. So, should we expect that the second half of the current financial year will be better than the first half and, more importantly timewise, when will be the time of breakout because we are in consolidation range for very long and one question which everybody is asking which way we will go and more importantly will this consolidation phase end soon?

Sumit Bhatnagar:
As the consolidation case is concerned, or when the markets will break out, probably we are not the right people. What we believe is that investors should look at the longer-term investment horizon and should continue to participate in the markets as the Indian story remains robust. So, yes, we do expect some bit of a time correction also in the market, but we do not expect major price corrections from here in the markets per se. And definitely we do expect some pick up in corporate earnings led by your consumption space as also pick up in the capex activity, which should lead to some bit of earnings pick up led by sectors like NBFC, cement, and FMCG.

ET Now:
And while we talk about the consumption theme, I would like to take it a little further from there. And now up next from here, another five-six months at least till December or the start of January will be the festival days at least for the Indian markets. We will start on the 15th of August, and then we will have all the festivals coming till the new year. Considering all of these, there will be a consumption theme, consumption demand, which will pick up. Let us say the FMCG, automobile, travel and tourism, and hotel sectors. What is your take on that, and how do you see the consumption story for the second half?

Sumit Bhatnagar:
I would say consumption looks good from at least a next two to three years perspective. One is that in the near term, the impact of RBI restrictions on lending has started to ease. You should see some bit of a pickup in credit growth or retail lending, which should support your consumption. Secondly, your income tax cuts should start flowing into the hands of people and get a significant chunk, which also should support your consumption, as well as the fall in interest rates and the liquidity available in the economy per se, which should lower the borrowing cost across and should push the consumer to spend a little more. And if you push it beyond, then your state pay commission and central pay commissions are due next year. So, effective money flow may happen maybe in CY 27, but that also should support your consumption significantly. If you look at the government stand also, essentially, what was happening was the government was purely focused on capex and had actually taxed the consumption a little bit more. So, in the form of higher taxes on individuals or the tweaking of tax rates on GST, which took out close to three to four lakh crores from consumers' hands over the last two years, we expect this to ease going forward. So, we do expect some bit of easing on GST also going forward to support the consumption, that is why all in all we do expect the second half festival, yes, to do well, but at an aggregate level also over the next three years, consumption should see significant traction.