BNP Paribas’ Abhiram Eleswarapu Urges Caution as Indian Stock Market Soars to Historic Highs

Abhiram Eleswarapu, Head of Equities at BNP Paribas, shared his insights with Mint about the current state of the Indian stock market. He noted that the market’s valuations are significantly higher than their historical averages and those of other Asian markets. He highlighted the strong optimism shown through robust domestic investments and a high interest in IPOs. However, due to these elevated valuations, Abhiram advises investors to adopt a more cautious and defensive strategy in the short term. Here are the key points from his interview:

Does the US Federal Reserve’s Rate Cut Remove Recession Risks?

While it was widely expected that the US Federal Reserve would cut rates, the size of the 50-basis-point reduction surprised some. Historically, it’s rare for rate hikes aimed at controlling inflation not to lead to a full-blown recession. However, this time could be different. Economic growth in the US may slow but still remain close to normal levels, indicating a “soft landing.” The labor market hasn’t experienced significant layoffs, unlike in previous recessions. Positive factors like rising wages, strong service sector performance, stable credit markets, and recovering lending trends suggest that a US recession may be avoided.

How Should Investors Handle Markets at Historic Highs? What About Market Valuations and Upcoming Q2 Earnings?

Abhiram points out that a closely contested US election has historically been followed by market pullbacks. However, rate cuts during “soft landings” often push markets higher. This means global signals are mixed right now. Meanwhile, investors have reacted positively to China’s stimulus measures.

India’s economic fundamentals remain strong, with the country keeping its twin deficits under control, a healthy banking system, and low corporate debt. Additionally, Indian equities have consistently provided better after-tax returns compared to other asset classes.

Despite this, the Indian stock market is trading at valuations significantly above its historical averages and other Asian peers. With such optimism, reflected by strong domestic investments and interest in IPOs, a cautious approach with a more defensive portfolio is recommended in the short term.

Do Mid-Cap and Small-Cap Stocks Justify Their Current Valuations?

Mid- and small-cap stocks have outperformed large caps due to better earnings and increased interest from retail investors. However, this has led to extended valuations. While not all mid- and small-caps are overpriced, some have become more expensive, offering less protection against risks than they did a few months ago.

Is It Time for Sector Rotation? Which Sectors and Stocks Should Investors Focus On?

Over the past year, both foreign and domestic institutional investors have reduced their investments in financial stocks, while putting more money into new-age companies, power, capital goods, and telecom sectors. Local investors, especially since the elections, have shifted towards defensive sectors like consumer staples, IT, and healthcare. This trend has led to financials underperforming the broader market, making their current valuations more attractive. With China’s stimulus, there could be a renewed interest in commodities. On the other hand, Abhiram expects consumer staples to face disappointing earnings, which may lead to their stock prices stabilizing rather than growing.

What’s Your View on Foreign Investment Flows into India? Will China’s Stimulus Affect This?

Abhiram believes that coordinated rate cuts worldwide could lead to increased interest in emerging markets as an investment category. This is good news for both India and China. While Chinese stocks have significantly underperformed compared to Indian equities, a shift in sentiment could result in larger foreign investments heading to China. However, investors are likely to wait for stronger economic data from China before committing to a longer-term strategy there, especially since similar rallies in recent years have been short-lived.