Geopolitical crisis may not impact D-Street, two RBI rate cuts likely this year: Bonanza Portfolio’s Achin Goel

Federal Open Market Committee (FOMC) Chair Jerome Powell emphasized the potential for hasty rate reductions to undermine progress made in curbing inflation over the past year.

The domestic economic landscape presents a contrasting picture, potentially paving the way for rate cuts in the second half of the current fiscal year (H2FY24). This outlook stems from the consistent downward trend in core inflation, which is expected to persist. While food inflation remains a challenge for the Reserve Bank of India (RBI), forecasts of a normal or above-normal monsoon season offer a measure of comfort. Furthermore, with projections indicating an acceleration in economic growth, we anticipate the possibility of one or two rate cuts of 25 bps each, says, in an exclusive e-mail interview with Zee Business’ Roshni Agarwal.

Achin Goel is a CFA (USA) and Certified Financial Planner (FPSB India), apart from holding a master’s degree in Chemistry from E. Michigan University, USA and B.Tech from ICT, Mumbai. He has also completed his PostGraduate Diploma in Insurance and Risk management from IIRM, Hyderabad. The expert currently spearheads the Portfolio Manager Services as a Portfolio Manager at Bonanza Portfolio.

Edited excerpts:

What’s your view on the current market, and where do you see the Nifty at the end of CY24 given the frequent eruptions of geopolitical crises and elections in major economies? Tell us in detail.

Indian stock market benchmarks – the Sensex and the Nifty 50 – has given impressive return of 29% and 25%, respectively in FY24. The midcap and smallcap indices outshone the benchmarks by a significant margin. The BSE Midcap index surged by a remarkable 63% while the BSE Smallcap index witnessed an impressive jump of 60%. The Indian stock market has given this return on the back of domestic investors’ confidence in India’s economic robustness and promising growth prospects.

Indian economic performance has remained robust despite global challenges and geopolitical concerns, majorly due to strong domestic demand, rural demand pickup, robust investment, and sustained manufacturing momentum. India’s retail inflation has also seen a significant downturn. Reflecting this trend, the Reserve Bank of India’s Monetary Policy Committee (MPC) decided to maintain policy rates at their current levels. March 2024 witnessed several indicators of robust economic performance, remarkable GST collections and substantial growth in both the manufacturing and services sectors making a strong case of robust economic stability of India.

In the recent past we have seen some volatility during geopolitical crisis like Russia-Ukraine, Israel- Hamas and Iran–Israel conflict but Indian stock market recovered strongly. So, in future also we don’t see any major impact of geopolitical crises on market as we expect major countries will only support from outside and such conflict will not escalate into major      war in near future.

Elections around the world are also likely to have a significant impact on the direction of the global economy. In India it is expected that current government is going to continue for the third term and had no major impact on the stock market. India and the US are exploring possibilities of a bilateral trade deal, however, with the impending US elections later this year, the incoming US government could take a different stand.

Recently, India VIX crashed 20% in a single day. How do you view it, and what should market participants know?

On April 23, 2024, the India VIX, a measure of market volatility, fell by around 20%, marking the largest one-day decline in about five years. Ahead of important events like the US Federal Reserve’s policy meeting and general elections, the fall stunned market players. On April 23, 2024, the VIX closed at 10.20.

The VIX typically declines after election results; however, this time, the decline is seen prior to the election as a result of the ruling party winning a strong mandate. Importantly data showed that in the months that have followed such a dramatic drop in the India VIX, Nifty 50 has typically produced positive returns. On the other hand, low  implied volatility (IV) usually suggests that the market might stick to a small range in the near future.

There is no clear indication from the US Fed on rate cuts this year. How do you see the development? Also, do you expect the RBI to slash rates in FY25? Why/Why not?

In October 2023, the Federal Reserve’s announcement of a peak interest rate cycle and planned rate cuts of 75 basis points (bps) in calendar year 2024 (CY24) triggered a global market rally. However, the mood has shifted six months later. Rising doubts cloud the Fed’s commitment to rate cuts due to surging crude oil prices, escalating tensions in the Middle East, and a slower-than-anticipated decline in inflation. Additionally, Federal Open Market Committee (FOMC) Chair Jerome Powell emphasized the potential for hasty rate reductions to undermine progress made in curbing inflation over the past year.

The domestic economic landscape presents a contrasting picture, potentially paving the way for rate cuts in the second half of the current fiscal year (H2FY24). This outlook stems from the consistent downward trend in core inflation, which is expected to persist. While food inflation remains a challenge for the Reserve Bank of India (RBI), forecasts of a normal or above-normal monsoon season offer a measure of comfort. Furthermore, with projections indicating an acceleration in economic growth, we anticipate the possibility of one or two rate cuts of 25 bps each.

What’s your view on mid- and small-cap space? Do you think the froth is over?

The mid and small-cap space offers high growth potential due to the presence of young companies with room for expansion. However, this segment is known for its volatility, meaning stock prices can fluctuate significantly. Major indices such as Nifty Realty, Infra, Metal, and Bank have gone above mid-march levels, when we saw a huge profit booking.

The next profit booking was seen because of the escalation in the conflict between Iran and Israel, which again the markets appear to have overcome. Some industries in small and mid-cap space offer optimistic long term outlook such as industrials, power and allied industries, investment services and defence. This is a good time to focus on companies in the mid and small cap space where valuation is justified regardless of profit booking in some of them, and ignore companies which are highly valued due to news and speculation.

Tell us about your overweight and underweight sectors.

 We have a high investment in sectors like Banking and Capital Goods, with Capital Goods being one of the best performers in the past year. The FY24 budget has allocated Rs. 13.9 lakh Cr. for capex, which is a 22% increase over the previous year’s budget, with a 13% higher allocation in Central Government capex. In the Banking sector, Indian banks have shifted their focus to liabilities due to declining liquidity and increasing credit demand. Despite the NIMs stabilizing, loan growth and stable asset quality are driving earnings growth.

We anticipate that improved rates will facilitate deposit growth. We have a low exposure to sectors like Consumption and IT, and we believe that these sectors may provide better entry opportunities in the coming months, despite being slow at present. We will be monitoring rural recovery on the demand front, with indications of normal-to-good monsoon and improved crop yield being key factors. The IT sector is also on our radar, based on factors such as accelerated digital transformation, cloud adoption, and the rise of Generative AI, which is expected to bring positive trends to the sector in the near-to-midterm. We are constantly searching for stocks in other sectors that provide ample growth opportunities and entering at a suitable point.

Given the strong response to Vodafone Idea’s Rs 18,000 crore follow-on public offer (FPO), do you feel the telecom sector in India is heading towards the best phase?

The success of Vodafone Idea FPO, which raised Rs.18,000Cr, coupled with a subscription of fresh equity worth Rs.2,075Cr by Aditya Birla group company, has triggered some optimism for the telecom sector. If Vodafone Idea can utilise the funds to roll out 5G and strengthen its 4G presence (~Rs.12,700Cr is allotted to network capex), this will improve Vodafone Idea’s market competitiveness as well as balance sheet. With improved balance sheet, Vodafone Idea may have the option to pay off its spectrum and AGR dues or negotiate with the government to convert unpaid dues into equity at prevailing share prices. All this will help India’s telecom services market not turn into a duopoly. A combination of tariff hikes and government support is expected to boost the telecom service market in India.

Tell us the investment strategy for your PMS schemes. What has been the investors’ trend in the past 2–3 years? What is one common query that you come across while dealing with investors?

We invest in our PMS schemes based on ongoing and prospective themes that will generate good value in the long run as well as portray good growth potential. Our research team constantly monitors the market for any upcoming diamond/s and based on certain selection criteria, we target the theme or the sector and monitor it to a point of selection.

With robust stock selection and continuous monitoring, our PMS has given tremendous return to the clients. Our ‘Bonanza Edge’ and ‘Bonanza Value’ schemes have delivered 81.9% and 79.6% return in 1 year, respectively and 47.1% and 26.4% CAGR return in the last 3 years, respectively.

The most common query that our investors ask us is: The Rationale behind buying or selling a particular stock at a particular time. Second question they most commonly ask is: how are we performing compared to the benchmarks.