'Asset allocation should be driven much more by long-term factors rather than the market scenario at any particular point in time.'
Equity market direction will hinge on domestic earnings, the trajectory of global growth and inflation, especially in the US and China, according to Chirag Setalvad, head -- equities, HDFC AMC.
In an e-mail interaction with Abhishek Kumar/Business Standard, Setalvad says positive surprises may emerge on the rural consumption front amid favourable monsoon and a low base.
What are your three key takeaways from the Budget from an equity market perspective?
The most important takeaway for me was that the government maintained fiscal discipline despite populist pressures.
Additional dividend from the RBI could have easily been used to boost vote-friendly expenditures, but it was not.
The second key takeaway is that the ongoing focus on capital expenditure has continued with an emphasis this time on housing and an increase in loans to state governments to fund their capital programmes.
Furthermore, the simplification of the tax regime and tinkering of tax slabs should usher great clarity and compliance while supporting demand as well.
Lastly, there was a much-required recognition of the need to create jobs through a combination of private sector encouragement, direct transfers, and reskilling initiatives.
Overall, it is a well-balanced Budget and the arithmetic is realistic, if not conservative, which gives it a lot of credibility.
Now that the elections and Budget are out of the way, what factors will dictate the market's direction from here on?
The market has done very well and valuations now are fairly demanding.
To sustain these lofty valuations, it is imperative that corporate earnings continue to deliver.
Besides domestic earnings, the trajectory of global growth and inflation, especially in the US and China, will certainly be important variables.
Finally, the outcome of the US election and subsequent policy changes may also play an important role in shaping investor risk appetite.
Do you expect any boost to corporate profits due to the Budget?
The Budget is neither a drag nor a boost to corporate profitability.
Given that corporate profitability is already quite high, we need a benign raw material environment to help support margins.
The raw material outlook will in turn be driven by the global growth landscape, macro liquidity, China slowdown dynamics and local factors such as the monsoon.
Otherwise, the normal levers of profitability, which include growth, utilisation and level of competition, among others, will continue to drive margins.
IMAGE: Chirag Setalvad, head equities, HDFC AMC
Photograph: Kind courtesy HDFC Mutual Fund/X
Which sectors are better placed from valuation and growth perspective?
The market has seen a very broad-based rally and all sectors have participated to varying degrees.
From a growth perspective, capex-driven sectors are poised well but the valuation there is not favourable.
The financial services sector has been a laggard and hence valuations there are more accommodative.
While credit growth remains encouraging, there are clear challenges on the deposit side and some incipient concerns on asset quality in select segments that need to be monitored.
The consumer staples segment has also been a relative laggard. With a favourable monsoon, improving rural terms of trade and a low base there could be some positive surprises that may emerge.
How do you see the Q1 results that have come out so far? Is the IT sector starting to see a turnaround?
The results for the quarter have only begun to trickle in and it is still too early to take a holistic call on the earnings trajectory.
For the IT sector in particular, there seems to be some stability in the outlook as far as growth is concerned.
However, we need this narrative to sustain and build further in order to be confident that there is a tenable recovery in demand.
How should investors go about their asset allocation in the present market scenario?
Asset allocation should be driven much more by long-term factors rather than the market scenario at any particular point in time.
Hence, long-term return requirements, liquidity considerations and risk appetite are important factors to consider when determining long-term asset allocation.
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Feature Presentation: Rajesh Alva/Rediff.com
