Don’t confuse the recent decline in stocks with a bear market: Vinit Sambre | Market News

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Vinit Sambre, Head of Equities, DSP Mutual Fund

Vinit Sambre, Head of Equities, DSP Mutual Fund

As India Inc prepares to unveil its financial performance for the September 2024 quarter (Q2-FY25), market movement is likely to depend mainly on earnings growth, said Vinit Sambre, head of equities at DSP Mutual Fund , in an email interaction with Shivam. Tyagi. Edited excerpts:


What is your understanding of the current market with tensions brewing in West Asia?

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The recent market pullback following a prolonged bull run should not be confused with a bear market. This is a minor correction after a significant rise in valuations. Several factors contributed to this decline, including escalating tensions in West Asia and slower earnings growth momentum compared to previous periods. Additionally, optimism about a possible recovery in the Chinese market, driven by expectations of stimulus measures after a prolonged downturn, played a role.

The main concern arising from tensions in West Asia is the potential rise in crude oil prices, which could disrupt the Indian economy, as the country is a major crude importer. Rising oil prices can increase inflation and worsen the trade balance. If tensions continue to escalate, this could lead to an uncontrollable rise in oil prices, which could leave market sentiment remaining subdued for some time.


Do you see a rally if the war remains local? Which sectors are you betting on in India?

It is reasonable to expect sentiment-driven market pullbacks. Regardless, with strong domestic liquidity coming from both institutional and retail investors, dips are likely to attract buying at more reasonable levels. Therefore, it does not appear that we are heading into a prolonged bear market, as small corrections will likely be viewed as buying opportunities.

Aside from banking and insurance, few sectors trade at reasonable valuations. However, we see potential in consumer discretionary as the sector has seen a slowdown in business momentum but could recover on the back of favorable monsoons and rising income levels among the middle and lower income groups. Additionally, the healthcare sector is experiencing solid growth and we are optimistic about its long-term growth prospects.


What type of correction can we expect: temporal decline or price decline?

There are two key points to consider right now: valuations and earnings growth. Indian markets have recorded substantial gains over the past few years, leading to high valuations by various indicators. Some of these gains were well deserved, thanks to strong profit growth across a wide range of sectors. However, after this period of rapid expansion, profit growth now appears to be moderating.

With limited valuation room, future market gains will likely depend primarily on earnings growth. Given the expected slowdown in earnings momentum, we expect markets to experience a phase of consolidation, or temporal correction. However, I do not foresee sharp and deep market declines, as long-term investors will likely look for opportunities to participate in India’s growth, which remains strong and intact.


Apart from West Asia, what global triggers can trigger an upward or downward movement for the Indian market in the short to medium term?

We need to closely monitor the interest rate stance of the US Federal Reserve as it significantly influences global markets. Although global inflation has remained relatively stable, caution is warranted due to the implementation of trade barriers by many countries, which could lead to inflationary pressures in the future. Additionally, commodity prices have become increasingly volatile due to these trade restrictions and ongoing geopolitical uncertainties.


Given the Reserve Bank of India’s (RBI) recent policy decision on interest rates, what is your interpretation of the situation regarding rate reductions, given the health of the economy?

The CPI is well below the strict target of 4 percent. The Core-CPI is in lasting decline. Demand indicators are in the red, both in urban and rural areas, particularly with the recent rise in food prices. However, while another argument remains around the robustness of India’s GDP, it has undoubtedly grown at a relatively higher rate, but it remains below its potential.

Traditionally, the risk of high growth translating into inflation intensifies when an economy is operating at full capacity. But, with India’s potential growth rising and current real interest rates relatively high, there may be more cushion to absorb rapid growth before inflationary pressures arise.

Current conditions are therefore sufficiently conducive to a cycle of rate cuts, and have been for several months now. And with the Fed cutting rates, we have enough reason “right now” to implement a modest rate cut, if not as big as the Fed. Furthermore, with the reconstitution of the Monetary Policy Committee (MPC), there are even more opportunities for a new perspective on the direction of monetary policy.

First publication: October 14, 2024 | 12:22 p.m. STI

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