DBS Bank’s Strategy: Why Small and Midcaps in India Are the Best Investment Choice Right Now

DBS Bank’s Senior Investment Strategist, Joanne Goh, has a neutral outlook on India but favors small and midcap stocks because they offer high growth potential and opportunities for strong returns. Here are key points from a recent discussion:

Valuations and Market Performance

DBS Bank believes that Indian stocks have performed well due to strong earnings growth and a significant rise in valuations from increased domestic investments. However, as economic growth slows down and corporate earnings stabilize, there might be a phase of consolidation, leading to varied returns. Despite this, the long-term outlook for Indian equities remains positive.

Impact of the Fed’s Rate Cuts

After the Fed’s rate cut in September, lower interest rates are expected to support economic recovery. The Reserve Bank of India (RBI) is optimistic about growth, predicting a 7.2% year-on-year increase for FY25, thanks to strong rural demand, active services sector, and ongoing investments.

Historical Context of Rate Cuts

Looking back at the Fed’s actions in 1995, the current easing cycle is similar in that it did not precede a recession. After that rate cut, the S&P 500 saw gains of around 13.9% in the following year, fueled by technological advancements. DBS Bank believes that today’s combination of economic stability and gradually falling rates, along with new technological innovations, will support asset growth.

India Inc’s Earnings Growth

The current government is expected to continue its policies from previous terms, focusing on expanding manufacturing and increasing capital expenditure. As reforms focus on supply, there may also be an exploration of consumption-driven stimulus, which would benefit economic and corporate earnings growth. India’s young population and low age-dependency ratio suggest a strong workforce that will support domestic consumption growth.

Retail Investor Sentiment

Despite a few concerns, India’s economy has shown strong resilience and is expected to continue thriving. The market anticipates a 16% earnings growth next year, a realistic estimate given India’s consistent GDP growth of 7-8%.

Focus on Tech and Other Sectors

DBS Bank maintains a neutral stance on India overall but prefers investing in small to midcap stocks. These sectors have strong growth potential, especially as the market cap-to-GDP ratio remains low. The technology, consumer goods, and services sectors are expected to drive growth in this space.

The IT sector, particularly software services and BPOs, is well-positioned to benefit from rapid digitalization. Companies involved in engineering, research, and development, as well as those utilizing AI, are likely to do well.

Additionally, the growing middle class and urbanization will enhance growth in consumer goods and services, including FMCG, retail, and e-commerce. Increasing income inequality also creates opportunities for premium products in areas like automobiles, beverages, apparel, and luxury retail.