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

While Federal Reserve Chair Jerome Powell has emphasised the potential for hasty rate reductions to undermine progress made in curbing inflation over the past year, the economic landscape in India 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 a consistent downward trend in sticky core inflation. 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.

"With projections indicating an acceleration in economic growth, we anticipate the possibility of one or two rate cuts of 25 bps each," says Achin Goel in an exclusive conversation with Zeebiz.com'shni Agarwal.

Achin Goel, CFA, is a Certified Financial Planner (FPSB India). He holds a Master’s degree in Chemistry from E Michigan University, USA, and a BTech degree from ICT, Mumbai. He has earned a PostGraduate Diploma in Insurance and Risk Management from IIRM, Hyderabad. Goel currently spearheads the Portfolio Manager Services as a Portfolio Manager at Bonanza Portfolio.

Here are the edited excerpts from the interview:

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? 

Indian stock market benchmarks have given impressive returns of 29 per cent and 25 per cent in FY24 respectively. The midcap and smallcap indices outshone the benchmarks by a significant margin. The BSE Midcap index surged by a remarkable 63 per cent while the BSE Smallcap index witnessed an impressive jump of 60 per cent. 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 for India's robust economic stability.

In the recent past, we have seen some volatility during geopolitical crises like Russia-Ukraine, Israel- Hamas and Iran–Israel conflicts, but Indian stock market recovered strongly. So, in the future, we don’t see any major impact of geopolitical crises on the market as we expect major countries will only support from outside and such conflict will not escalate into major war in the 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 the current government is going to continue for the third term which will have 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.

Volatility index India VIX crashed 20 per cent in a single day recently. How should market participants view this? 

On April 23, 2024, the India VIX, a measure of market volatility, fell around 20 per cent, 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?

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 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 emphasised the potential for hasty rate reductions to undermine progress made in curbing inflation over the past year.

Do you expect the RBI to slash rates in FY25?

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 midcap and smallcap stocks? Do you think the froth is behind?

The midcap and smallcap spaces offer 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 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 the smallcap and midcap spaces offer optimistic long-term outlooks such as industrials, power and allied industries, investment services, and defence. This is a good time to focus on companies in these segments where valuation is justified regardless of profit booking in some, and ignore companies that are highly valued due to news and speculation.

Are there any sectors you are overweight or underweight on at the moment?

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 crore for capex, which is a 22 per cent 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.

What's your preferred investment strategy for your PMS schemes?

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 per cent and 79.6 per cent returns in one year, and recorded 47.1 per cent and 26.4 per cent CAGRs in three years, respectively.

Is there a common query that you receive from your investors?

Yes, it is: What is the rationale behind buying or selling a particular stock at a particular time?

The second most common question they ask is: How are we performing compared to the benchmarks?