Rahul Singh, CIO-Equities, Tata Asset Management says India is better placed than China and several developed countries but further rate hikes by the US Federal Reserve can cause dislocation in financial markets.

At home, populist fiscal moves leading up to the 2024 general election will be perceived negatively, says Singh who has over 27 years of investment experience.

He expects mid and small-caps to gain on the back of “strong fundamental” changes in the Indian economy. In an interview to Moneycontrol, he says the real estate sector is benefiting from genuine demand and a virtuous cycle of strong developer cash flows and launches. Edited excerpts:

Do you think midcap and smallcap segments will continue to be strong even after the recent rally?

Small and midcaps performance has been strong on the back of fundamental changes that are taking place in the economy. It is evident in the recent GDP data also that investment is growing faster than consumption and this is happening after a long gap.

There are various drivers of the investment cycle — government, private as well as households — and is being helped by the revival in manufacturing investments and a potential shift in global supply chains towards India and energy transition.

While execution and policy risks remain, this could be a multi-year trend and support the valuations.

Do you expect the consolidation in the market to continue till the Q2FY24 earnings season or the confirmation of the end of the rate hike cycle by the US Fed?

The consolidation is healthy as markets take stock of the emerging dynamics in the interest rate cycle, which seems to be one of a long hawkish pause. In the context of the soft landing in the US and the structural slowdown in China, India is standing out.

In addition, the health of corporate and bank balance sheets is superior to China and developed markets. While this may sustain the valuation premium for India, the higher interest rates may continue to constrain equity valuations. The present consolidation phase is a net result of that.

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Your take on the real estate space? Are you increasing exposure to the space?

The real estate cycle is benefiting from the pent-up demand and virtuous cycle of strong developer cash flows and launches. The demand has remained robust, notwithstanding the hike in interest rates, and hence is a reflection of the strong underlying trend.

The sector seems to be in mid-cycle at present, as it is being driven by genuine demand and it usually ends with speculation and investor demand.

What do you make out of the first-quarter GDP data?  What is your outlook for the rest of the current financial year?

The first quarter GDP data has confirmed what we have already been seeing in corporate earnings i.e. investment doing better than consumption and while urban consumption has fared better than rural, it is slowing down too.

We need to watch out for any stimulus to boost consumption in the second half, especially as we approach the general elections.

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Any risks, apart from oil prices and commodities, which can dampen sentiment? 

Fed actions in terms of any further rate hikes can pose a risk to the US GDP growth rate and potential dislocations in the financial markets. Significant stimulus can raise commodity and oil prices and also inflationary fears apart from being negative for India’s macros.

In terms of domestic risks, any populist fiscal moves leading into elections will be perceived negatively.

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