dbs bank on india: DBS Bank neutral on India but prefers small and midcaps

DBS Bank’s Senior Investment Strategist Joanne Goh says they have a neutral stance on India but on a risk-adjusted basis, the preference is for small and midcaps where high growth potential offers opportunities for significant returns.

Edited excerpts from a chat:

Your investment outlook report is bullish on equities following the Fed’s easing cycle. In the Indian context, how significant is the issue of valuations?
The outperformance of Indian equities has been powered by robust earnings growth, coupled with significant P/E rerating led by rising domestic inflows that sent valuations soaring. As economic growth moderates and corporate earnings experience some slowing, we may see a period of consolidation and variability in returns. However, we remain confident that the longer-term outlook continues to be promising.

Following the Fed’s rate cut in September, an environment of lower rates will catalyse economic recovery. Despite signs of a slowdown in cyclical indicators, the RBI maintains an optimistic view on growth based on stronger rural demand, service sector activity, and investments, keeping FY25’s growth forecast at 7.2% YoY.

The Fed’s easing cycle has not always led to higher stock prices. How relevant do you think the history of 1995 is, when the S&P 500 registered nearly a 14% gain in the subsequent 12 months following a rate cut?

The Fed easing cycle today mirrors that of 1995—the one occasion where Fed easing did not precede a recession. After the initial rate cut, the S&P 500 registered strong average gains of approximately 13.9% in the subsequent 12 months as the arrival of the Internet started a new industrial revolution and propelled economic growth.Similarly, the combination of economic resilience and gradually lower rates, overlaid with game-changing technological advancements that we see today, will drive productivity gains, providing tailwinds for risk assets.

Do you believe India Inc’s earnings growth trajectory is robust enough to keep pace with rising share prices?

The incumbent NDA coalition is expected to follow through with policies that were kickstarted in the previous term, including expanding the manufacturing footprint and a capex push. With much of the recent emphasis on supply-driven reforms, we think authorities may begin to explore consumption-driven stimulus, which will help drive economic and corporate earnings growth.

Longer-term, unlike the aging and dwindling populations of many developed economies, a low age-dependency ratio provides evidence of India’s fast-growing and youthful population—this gives India a massive working-age labour force and a backbone to support the expansion of its resilient domestic consumption. While food and other staples form the bulk of India’s household consumption today, we believe upward income and social mobility will drive growth across all consumption categories moving forward.

Is retail investor exuberance becoming a concern in India?

India’s economy has demonstrated remarkable resilience thus far and is poised to sustain its strong performance this year. Despite challenging macro conditions, market consensus expects earnings growth of 16% next year, a reasonable estimate given India’s strong GDP growth averaging 7-8%.

How bullish are you on India’s tech stocks? Which other sectors do you favour?

We maintain our Neutral stance on India. On a risk-adjusted basis, we prefer India’s small- to mid-cap segment, where high growth potential offers opportunities for significant returns, especially as the market cap-to-GDP ratio remains low. Key sectors contributing to the growth in the mid/small cap space include Technology, Consumer Goods, and Services. We see opportunities in well-established financial institutions, as well as Fintech companies innovating in the sector.

India has a robust IT sector that includes software services, IT consulting, and business process outsourcing (BPO). Amid rapid digitalisation, companies involved in engineering and research and development, as well as those benefiting from AI commercialisation and digital tech spend should perform well.

Furthermore, a rising middle class and increasing urbanisation add to the growth of the consumer goods and services sector. This includes companies involved in FMCG, retail, and e-Commerce. Recent trends in widening income inequality present opportunities for premiumisation in sectors like autos, beverages, food, apparel, tourism, and luxury retail.

_{Images are for reference only.Images and contents gathered automatic from google or 3rd party sources.All rights on the images and contents are with their legal original owners.}