What are you making of the fairly fragile global setup currently? Do you believe that if we were to see the undertone of the market back home changing, that would largely be led by global events?
In the last few weeks the outlook on the global market has deteriorated due to some kind of a risk-off, flowing from the fact that there could be one more rate hike. So the risk to the global markets and especially the US market is very much there. Also while up till now, the outlook on growth has been fairly stable, if rates continue to remain higher for longer, then we could see some downgrades to earnings growth globally coming in the next calendar year. The risk clearly looks at the global side. Also, some commodity prices, especially oil, have moved up and that also poses some additional risk especially from the Indian point of view. But clearly, there is some amount of caution and it looks like global markets are in a correction phase.
When will it start impacting India because bond yields are at 4.5%-5% and some would argue why invest in India at all? After all, they are getting 5% assured returns in US debt?
Yes, you are right. The yields there are attractive and in fact we have been launching a fund. We invest in US bonds because the risk reward is too attractive. But again it is a question about the opportunity cost. One can play that trade over the medium term but money which will come into India would come in slightly from a longer-term perspective.
In India, despite all the global concerns, we are still looking at a fairly reasonable kind of a growth outlook. We are not seeing any major challenges over there. Earnings growth also would be in the mid-teens which is fairly good. Also the runway of growth for India looks to be much better. India offers the best kind of market where one could see that runway of growth lasting for many years. That is what will draw global investment.
In the short term I would agree because of what we have seen in the last couple of weeks. This month till date, the FII outflows have been negative. That trend can continue for some time but long-term money would look to buy into the dips.
In your portfolios, what have you done when we hit that all-time peak pretty much at the start of the month to the way we slipped from there and there has been a 3.5% dip at the index level?
So try to be slightly cautious as we have seen a sharp rally in many stocks in the last six to eight months and some of them have been driven purely because of liquid reasons not necessarily any fundamental change in view. So booking some gains over there, trying to trim some of the exposures there where the run up has been too sharp and say beyond our comfort levels.
Apart from that, more recently, the mix towards midcap and small cap in the portfolio is trying to cut down a bit depending on the fund mandate and more towards largecaps where the risk reward looks to be slightly better than say in the mid and smallcaps. Though I would say the mid and smallcaps from a medium long-term perspective still looks good, but one should be more stock specific.
Also, we have seen some rally in the global stocks because the global growth numbers got upgraded last month but one would still be cautious over there. In some of the global linked sectors which have rallied recently, we are trying to take some gains over there and then trying to raise some amount of cash but not too much because it is the best time to time the market over here as our outlook is still fairly positive from a medium-term perspective.Why are banks not participating?
Earnings growth is fairly stable in the case of banks. We do not see any major setbacks over there. The fact that interest rates are going to remain higher for longer means the concern which was there on the banking stocks because when rate cut happens, you would probably see a NIM compression. But that is not likely to happen soon.
It is probably to do with the high ownership which is there and not only domestic but for FIIs also and we have seen a large amount of selling in leading banks where we have seen management changes or merger issues. It is because of primarily being over owned and the fact that the best in terms of the interest and maybe margins is behind us, but that does not mean that the banks would see any major cut in earnings.
They look fairly steady and valuations are fairly okay. They are probably in line with long-term average or slightly below that. So it is more about sector rotation. Money has moved to other sectors where the growth outlook looks to be better but I would say the banks look fairly stable. Also, we have seen some movement towards NBFCs in the last three months where the growth has been much better and now margin expansion could play out as rates come down over there.
Are you being very selective when it comes to IT?
In the IT sector we have seen a good bounce back in the last couple of months. A lot of the large IT companies have been seeing good deal wins in the last quarter and that has given some hope that while we might see next one or two quarters which could be weaker, next year again there could be some bounce back in terms of the growth looking at the deal pipeline. Also the rupee has been in a slightly depreciating mode and that is the reason we have seen the IT sector do well. But again, within IT, one has to look at companies which have got better execution capabilities or are executing much better.
They are mixed in terms of which segments they are catering to. We will see far more differentiation in terms of growth for the IT sector. A few companies will be growing at around 12 to 15% while others will grow at around 5% or so. In that scenario, it will be important to be more stock specific because we will see the tailwind across the board.
What is the tactical trade for next one year or so? A year ago, it was buy banks, avoid IT, suddenly banks are underperforming, IT is coming back. Where do you think there is an interplay of both tactical as well as structural?
India’s growth and what is happening both on the manufacturing and on the investment side, is going to be much more sustainable and structural. That is driven by multiple factors, both what we are doing internally also and what is happening globally geopolitically where countries are trying to move away from China.
That story which has started to play out looks to be far more sustainable. In that context, India’s discretionary consumption has been weak but India is now reaching a threshold of per capita GDP of around $2500. That will lead to a secular increase in terms of discretionary spend. These are some of the sectors where one would take some more. Tactically it is very difficult to say because a lot of things will keep on changing, but these are sectors where one would take a slightly structural view and there may be correction in these sectors whether it is industrials, capital goods or power sector itself,
After a long time we are seeing that the deficits in the power sector could increase and capex both in coal as well as renewables is likely to pick up and that will have a downstream impact on the other suppliers also over there. Even real estate is looking fairly good and steady despite the fact that interstates have gone up.
There is a reasonably good outlook there and we see better execution from the larger players and consolidation in the industry. All these sectors are more domestic facing.
On the global side, this is a good opportunity to really build exposure in IT because the current slowdown is more because of discretionary spend cuts and the structural story in IT in terms of spends towards digital and with AI taking centrestage, IT sector could bounce back going forward. It would be more a contra tactical trade to buy in this recent slowdown.