Indian equity markets are expected to see another 5% rally during the first quarter (Q1) of fiscal year 2024-25 leading up to the general elections, says Andrew Holland, Managing Director and Head of Equity Capital at Avendus Capital.
In an interview with Moneycontrol, Holland pointed out that markets often see a positive momentum in the run-up to major political events as uncertainty surrounding the outcome dissipates. This was visible during recent state elections as well.
Holland believes multiple factors are aligning in favor of Indian markets. Firstly, interest rates are likely headed lower both in India and globally. The US Federal Reserve’s dovish tone has reaffirmed expectations of rates cooling off. Lower financing costs are positives for sectors like banking and real estate.
Secondly, corporate earnings are anticipated to rise next year as government and private sector capital expenditure initiatives boost activity levels across sectors. Stable oil and commodity prices should also support company margins.
Thirdly, the overhang of the general elections would be removed post the outcome. History shows Indian equities have tended to perform well in the 1-2 quarters after a stable government is back in power.
Within the market, Holland sees banking, IT and metal stocks driving the 1QFY25 rally. These sectors have a significant weightage on indices and tend to benefit immediately from positive macros. While IT earnings may continue facing short term pressures, its medium term outlook is brighter on softer rates and steady client spends.
Banking is poised to gain from declining cost of funds and improvement in asset quality. Lower rates will relieve pressure on net interest margins. Metals demand should get a leg-up as infrastructure spending picks up pace.
Though near term concerns around elevated valuations and excessive secondary market supply persist, Holland is staying with his positive long term view. He expects earnings momentum to kick in once private capital expenditure revives over the next 12-18 months. Also, price corrections in oil and base metals from recent peaks have eased inflationary pressures.
Of course, geopolitics and the China factor remain key monitorables. Any escalation in global tensions or a strong stimulus by China divert flows away from India. Domestically, changes to capital gains tax structure prior to the elections could trip markets in the interim.
Nonetheless, given the domestic and global macros aligning favorably, coupled with pre-election optimism, Andrew Holland expects the Nifty50 and Sensex to rise 5% from current levels during January-March 2024 quarter. Backed by sector specific tailwinds, leading market indices may well embark on an upward journey in the near term.
