The bulls on Dalal Street have taken a breather after a record-breaking run. Driven by increased foreign investment flows, the Sensex and the Nifty are up over 15 percent from their March lows. This comes as concerns about a looming recession in the United States have eased and India’s domestic economic fundamentals have improved.

In an interview with Moneycontrol, Kranthi Bathini, Director of Equity Strategy at WealthMills Securities Pvt. Ltd., expressed his concerns about inflation remaining the top concern for global equity markets. He said that prolonged high interest rates could result in inflation, which could weigh on stocks.

Bathini remains bullish on India’s defence and infrastructure sectors but tells investors to remain cautious on some sectors in the near term.

Edited excerpts

What are the key factors driving the current bull run in the Indian markets?

The key factors driving the markets now are, first and foremost, improving domestic macros that reflect the resilience in the economy and India’s recognition as a potential manufacturing hub, which fuelled the confidence of FPIs (foreign portfolio investors) in India.

In your analysis, what are the top three potential threats or risks to the sustainability of this raging bull market?

Inflation is a key cause of worry for the markets now, which can lead to a prolonged environment of high-interest rates that can pose a threat to growth and the equity markets.

The global macro environment is crucial now. The US Federal Reserve’s unprecedented action on the interest rate cycle indicates two more successive rate hikes. Headwinds from international shores arose, global factors like the current Fitch factor paused the rally in the markets, and the war in Ukraine is still ongoing. But for Indian markets, external global factors are influencing more on the negative side than domestic factors.

Considering the current market conditions, which are the three sectors you have a bullish outlook on? And what are the underlying reasons for your optimism?

Irrespective of the underlying market conditions, the basic principle of investing doesn’t change. Staggered buying on well-researched themes and ideas and using intermittent correction to buy good-quality companies at decent valuations is always a safer way of investing.

We have remained positive on defence as a new emerging sector in India with increased earnings visibility and a sustained order book. Indian defence sector-oriented companies are now demonstrating their strengths and capabilities to their global peers.

Thanks to the increased capex by both the private and government sectors, there is a great focus on the infrastructure, industrial, and capital goods sectors. As India emerges as a manufacturing hub, the focus remains on infrastructure and capital goods.

What are your views on the IT sector?

As per the data, the US economy is going from strength to strength. But there are (still) lingering worries about the US economy, recession, and banking and financial sector outlook. And that’s a cause for concern for large-cap IT stocks. However, contrary to the stock guidance for large-cap IT stocks, mid- and small-cap IT stocks are quite resilient due to the domain and geography in which they operate.

Due to the strong, sustainable business models of large-cap IT stocks, investors with a longer-term horizon can start picking large-cap IT stocks in a staggered manner.

For retail investors looking for short-term gains, which stock would you recommend?

Mid- and small-cap stocks across all sectors have witnessed fabulous gains in the stock market rally of the last few months. In the medium to short term, investors can accumulate stocks in the auto, defence, and capital goods sectors at any dip for shorter-term gains.

As some sectors show signs of volatility, which are the ones where retail investors should exercise caution?

Retail investors get attracted by the price momentum of stocks. They should exercise trailing stop losses while chasing momentum stocks and sectors.

Following capacity constraints and surging freight rates in 2021 and early 2022, the decline in freight rates has injected additional uncertainty in the shipping and logistics sector.

The pandemic presented some unique opportunities for companies in the sector. Shippers had to adjust to earlier piled-up stocks in the second quarter of 2023. Effectively, this has created an accelerated slowdown across supply chains. As freight rates declined and supply chains stabilised, the Baltic dry index corrected more than 50 percent from its recent highs. Keeping this in view, in the medium term, one should avoid stocks in the shipping and logistics sector.

Over the past few years, the Indian chemicals sector has exceeded all shareholder expectations, outperforming not just the overall equity market but also the majority of its upstream and downstream industries. But China’s opening up and signs of a global slowdown saw demand slowing down, which in turn caused margin compression. This exerted pressure on stocks in the specialty chemicals segment. One should be very stock-specific in this sector and exercise caution in the short term.

How do you assess the performance of IPOs in the first half of 2023?

Thanks to the (secondary) market rally, euphoria has built up in the primary market. Also, IPO stocks from the previous year have bottomed out. Now there is greater investor attention in the primary markets. The BSE IPO index has gained significantly in the last six months, from 7,600 levels to around 10,400 levels.

And most of the recently listed companies are performing well.

Looking ahead to the second half of 2023, are there any specific IPOs that retail investors should closely monitor?

The same kind of buoyancy can be expected to continue in the IPO market in the second half of 2023.

Approximately 29 to 30 companies are lined up to raise nearly Rs 35,879 crore and are awaiting SEBI approval. Among these IPOs, Tata Technologies will be noteworthy, as it is recognised as a global engineering and product development digital firm catering to various industries, including aerospace, automotive, and industrial heavy machinery.