Watch For Auto, Rural Consumption Sectors In Election Season Says Vijay Chandok

The market has been on a roller coaster for most of 2023. But in December 2023 when the Sensex crossed the 70,000 mark, it brought a welcome positive end to the year. But now the question is what’s in store in 2024, the year that will see the general elections and the third test for the ruling Bharatiya Janata Party. The big event is expected to keep market participants on their toes, as election years typically bring in volatility. Vijay Chandok, managing director and CEO of ICICI Securities, spoke to Nidhi Sinha, editor, Outlook Money, about what’s in store in 2024 for the stock market, where investors can find opportunities and where they need to tread with caution. Here are the edited excerpts

The markets were volatile throughout 2023, though they ended the year on a positive note. Usually, the markets are also volatile in the election season. How do you see the markets behaving during the 2024 elections?

Generally, in the run-up to the elections, multiplier effects come into the economy as you find that government spending is quite robust. All that leads to consumption, which tends to be on the higher side.

But this time around, we are coming on the back of a slightly inflationary environment. So, the consumption pattern is slightly different from what we have seen in the past. We are seeing a K-shaped recovery on demand. That is something that is expected to continue. Typically, it’s the fast-moving consumer goods (FMCG) sector, which gets impacted positively. This time, the auto sector is getting positively impacted, while FMCG is still flat. The other thing is that rural India also tends to showcase the consumption story.

Going forward, I think two-wheelers, rural consumption, and auto consumption are expected to show growth.

Are there other big sectors to watch?

Over a longer horizon, based on what is happening around the world as well as some of the measures of reform that the government has implemented in the recent past, I think some very interesting opportunities have opened up.

One of the segments that we are quite excited about is the entire energy transition to clean energy space and renewables. Data sciences, data centres, application programming interface (APIs), those are interesting areas that are expected to see growth. Then some of the production-linked incentive (PLI) schemes are leading to growth in the electronics manufacturing sector, which is another new segment that is throwing up an opportunity. And let’s not forget the expenditure that the government is doing towards modernising railways and the defence sectors.

Then there’s telecom. That’s also an area of continued growth given high consumption by young Indians.

Power is an area where there has been a little bit of confusion, but as economic momentum and growth is taking place, it’s becoming clear that apart from renewables, the traditional areas of power are also good. I think they can co-exist, and places which have underperformed for a long period in the past are beginning to see traction, and we expect that to continue.

Finally, let’s not forget banking. That’s also an area which has got a lot of prospects for growth.

Could you tell us a bit more about the banking sector?

In the last few years, we’ve seen a big cleanup in the banking space. Currently, almost every bank is sitting on a clean balance sheet with strong capital position. That’s been reflected in the medium term rise in the market valuations of most of large banks and others. We believe a lot more growth is expected, particularly in large caps and some of the large-cap public sector banks.

Right now, there are four important drivers. The first is the new-to-credit segment. The banking business can expand into this segment as the economy expands, and it will continue to provide a great amount of bottom-of-the-pyramid momentum.

The second is the trend of growing affluence, leading to big opportunities in the wealth management and private banking space.

The third opportunity for growth is the mid- and small-cap segment, the small and medium enterprises (SME) and the micro, small and medium enterprises (MSME) spaces. This segment is always looking for growth capital and can provide good momentum. This segment has been a large part for most expanded economies, and I think India is going to be no different.

Fourth is digitisation. The banking sector is a big beneficiary of this as it has been among the leaders in terms of using and embracing technology. It is to be seen how newer models can be integrated into business efficiencies and create new and bigger opportunities.

The banking system has still got great potential. We remain very optimistic about its medium-term story.

The year 2023 was marked by a rally in mid- and small-cap stocks. Was that supported by fundamentals? What’s the way forward?

Small- and mid-caps have seen a great run in the last nine months to a year. Though questions have been raised about whether that is justified, if you really dissect it, you will find that it’s largely earnings related. So, it is fundamentally driven. The earnings have come because of margin improvement and that has happened because capacity utilisation is going up. We’ve also seen that most of the companies have got much better balance sheets, and debt levels are also low. Overall, it’s on the back of improved profit profile.

But what does it mean? In the immediate term, one needs to understand that with a significant rally in a short period of time, there is always the risk of a pullback or volatility. Typically, mid-caps and small-caps are a lot more volatile than large-cap companies. So, if there is a pullback due to any factor, either domestic or global, it will probably be sharper. So, one needs to be cognisant of that. But given the medium-term prospects of India as a growth story, it is inevitable that these categories will benefit.

While one needs to be cautious at the current levels, that doesn’t mean that you’re done with the growth momentum that the segment can offer in the longer term. You have got to probably keep watching for certain corrections, which could be great opportunities to buy. It could also be a great time to identify specific growth stories, which have not yet caught on to the rally as much as few of the others. There are still gems lying in this space.

The environment social and governance (ESG) sector is another emerging theme in India, with increased focus on clean energy. Do you see it as the next big story?

ESG is a relatively new concept, but it’s growing and gaining acceptance rapidly. More and more investors are integrating ESG frameworks into their investment and selection processes. Going forward, we will probably see more and more ESG-focused funds, which have already entered the market.

I certainly think it’s going to be an important next story, though I wouldn’t single it out as the only big story.

The thing that may matter is a company’s own commitment towards net zero goals and voluntary disclosures, beyond what is legally required. Investors are going to give more importance to these elements.

There is political unrest in parts of the world that can be a destabilising factor. What would you suggest from that perspective?

One needs to keep in mind that it’s not just domestic factors which impact markets, but also global factors. Typically, when there is some kind of unrest globally, commodity and oil prices tend to spike. I think, fortunately, we are seeing that the impact of these factors, at least in the immediate term, is minimal, which is good for the economy.

But one needs to keep watching the situation as it evolves and be cognisant of the fact that it could have an impact on the economy, and eventually the markets.

We are entering the New Year. What are the trends that investors should watch out for?

Post-Covid, we saw many trends emerging in the markets. Young investors started entering the markets, the use of digital media to access the markets became common, and people from smaller cities and towns started participating in large numbers. What is intriguing is that a lot of these newcomers are taking to trading as a way of participating in the markets. But I really worry about that.

The biggest thing that people should watch out for is mistaking investing for trading. In fact, a recent report from the Securities and Exchange Board of India (Sebi) said that 90 per cent of the people who are trading in futures and options (F&Os) are ending up losing money.

One should think of trading more as a tactical move. It’s best that you create your core portfolio in a more long-term asset allocation framework model and think of trading as something which is satellite to your own portfolio because there will be tactical opportunities arising later.

The younger population seldom thinks about goals, especially long-term ones like retirement. What is your advice to them?

The retirement goal is a subject close to my heart. The concept is never talked about the way it should be talked about probably because of reasons, such as it seems too far out into the future. But one needs to realise that it’s going to happen at some stage, and one needs to plan for it. Longevity is improving in India and the money you put aside during your active working years is what will support you later. I believe there’s a big gap in understanding, appreciating and planning for retirement.

Also, I think the market may not have appropriate instruments for this goal. Therefore, one needs to think about investment on their own at a reasonably early age, ideally, 35-40 years. That’s because when you start early, the effect of the power of compounding will take care of your golden years.

It’s important to look at retirement comprehensively, so it’s important to plan.

nidhi@outlookindia.com