If the election outcome meets public consensus, the stock market will deliver good returns in FY25, says Naveen KR, smallcase Manager and Senior Director at Windmill Capital. In a chat with ETMarkets, the fund manager also talks about why he is bullish on gold and PSU stocks. Edited excerpts:
Stepping into FY25, do you think the overall market returns will moderate or do you continue to see double-digit returns?
Naveen KR: It’s a fool hardy job to predict market returns over any time period. That being said, one of the major events that’s going to drive returns in FY25 is the election outcome. If the election outcome meets public consensus, I don’t see any reason why markets won’t be able to deliver good returns.
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Many argue that while valuations have moved above the long-term averages for midcap and smallcap stocks, earnings growth has not been in sync. Do you think this catch up could happen over the medium term and justify valuations?
I think the actual case is quite the contrary. In the last two years (Feb ‘22 to Feb ‘24) all of the rally has been driven by earnings growth instead of P/E multiple rerating. Hence, I believe that the business fundamentals for mid and small cap companies are pretty strong.
Also read | Fund Manager Talk: Inflows into small and midcaps ahead of earnings, says Ashish Naik of Axis Mutual Fund
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In FY24, capital flows into equities from FPIs as well as DIIs ran parallel, and adding to it was retail money. What does the flow picture look like for FY25?
Naveen KR: There is not one singular factor that determines the direction of these flows. It’s a confluence of macros, fundamentals, business environment, valuations, and so on. Therefore, every section of the market will assess the overall picture and then decide the flow of funds. As mentioned above, if things go as per consensus, then one should expect flows to be robust.
With interest rates seen moving downwards this year, which are the sectors that could throw opportunities and you would bet on?
Naveen KR: With interest rates going down, I feel more than any sector per se, from an asset class perspective, gold could benefit. You see, gold is a non-interest bearing instrument, hence if rates come down, then investors would prefer holding on to gold as compared to a debt instrument. Housing sector and auto sector could be another beneficiaries due to drop in rates.
While India remains one of the best emerging markets to bet on today, what are the potential risks that investors need to be aware of?
Naveen KR: The most significant risk that India could be running is overheating of financial markets. While India is one of the best emerging markets right now, few investors do feel that we are overvalued. As long as fundamentals catch up with prices, things are in control.
FY24 was a year for PSU stocks. Is there more steam left in this space?
Naveen KR: One would most likely think that there is more steam left given the strong rise in few sectors which are heavily PSU dominated. If the story of sectors like energy, railway infrastructure, defense remain intact, PSUs should most likely continue to do well. PSU banks have also cleaned up their books substantially which has aided their performance.
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Which are the domestic themes you have your eyes on?
Naveen KR: All sectors exposed towards government capex like railways, power, capital goods, housing and the likes are something we have a keen eye on. There are a lot of fresh developments happening in the auto sector (EV adoption) and FMCG space (emergence of young D2C brands over incumbents). So it will be interesting to see how things pan out for sectors as well as individual companies.
