For Nuvama Capital Markets president and head Shiv Sehgal, the financial year 2023-24 is a tale of two halves as far as equities go. Right now, slowing growth is the biggest headwind. In the second half, peaking rates, lowering of macro-vulnerability and improved balance sheets will provide the tailwinds.
With nearly two decades of experience in investment management and the financial services industry, Sehgal prefers domestic-oriented businesses over those driven by exports. The domestic economy will likely be more resilient than the global economy, he reasons.
Sehgal tells Moneycontrol in an interview that the Indian economy is unlikely to face any major disruption as demand drivers and inflation are well placed. Edited excerpts:
Do you think India's growth could see more headwinds than tailwinds in FY24?
I think the context matters. In FY24, global growth is likely to further moderate as the full impact of monetary tightening and the banking crisis unfolds. This will definitely have spillovers on the Indian economy with regard to growth. However, unlike in the past, the downside is likely to be smaller and shorter.
This is because (i) India's macros remain quite strong. The trade deficit is already narrowing and services exports remain strong. As a result, the pressure on the rupee, which requires the RBI to drain liquidity and raise rates becomes much lower. ii) India’s banking system and corporate balance sheets are probably as best as we can get. Hence, the multiplier impact of the downturn is likely to be much lower this time as compared to the past. iii) The impact of reforms undertaken in recent years will start showing up going ahead. Hence, to that extent downturn should most likely be shortlived.
So while there could be some increase in growth headwinds in FY24, there are likely much less than that prevailing in the world and also tailwinds from lower macro-vulnerability are likely to play through. In addition, the Fed is being given important flexibility to end (and eventually somewhat reverse) its aggressive tightening campaign, while lower rates (will) help to bolster equity multiples. All this, coupled with favourable technical factors (like positioning + sentiment), is why I stay more bullish than most.
Also read: Q4 Preview | No uptick in rural demand; volume growth of FMCGs to stay muted, say analysts
Do you think the market is not worried about inflation now? If yes then do you see a possibility of about 100 bps cut in the repo rate by RBI in the second half of FY24, especially ahead of the general elections?
Yes, the concerns have clearly pivoted from inflation/CAD (current account deficit) to growth. Hence, to that extent rate hikes are certainly ruled out. However, such a large rate cut may not happen in FY24. The timing and pace of rate cuts will depend on Fed actions, inflation and growth outcomes.
What is apparent is that one of the most aggressive monetary tightening campaigns ever has effectively come to an end in the US, while upcoming inflation and especially labour data should take even more pressure off Jerome Powell and his colleagues.
What is the biggest risk for IT companies in FY24?
The biggest risk for IT is a broad-based banking slowdown in the US and Europe. This will result in sharp spending cuts not just in banking but also other industries. The sector may face delays in decision-making and potential technology budget cuts by clients in the near term due to the uncertainty arising from the recent global banking crisis. Though for now, order wins remain healthy for Indian IT vendors as their key strength is also IT outsourcing and cost optimisation.
Also read: IT sector analysts predict muted revenue gains in Q4, bleak near-term BFSI outlook
Will the primary market be busy in the second half of 2023?
The IPO market has been lacklustre for more than a year. Expectations from companies to that extent have moderated and valuations in the unlisted space are now quite reasonable. Hence, if markets remain stable, then H2 2023 should see a large number of listings as a lot of good companies are now sitting on sidelines and could tap the market.
Are the dividend yield stocks look attractive for investment now?
Yes, dividend yield stocks do look attractive as rates have mostly peaked and the gap between their yield and risk-free rate should widen.
Do you see more headwinds than tailwinds for equity markets in the current financial year?
For equity markets, the year is likely to be a tale of two different halves in my view. Tailwinds in the second half emerge from peaking rates, lowering of macro-vulnerability and improving balance sheets. While right now the major headwind is from slowing growth.
Overall, I remain bullish for three main reasons: 1) the consensus is misdiagnosing the regional bank crisis and its ramifications, preparing and positioning for a Lehman-like fallout when the reality will be much more benign; 2) one of the most aggressive monetary tightening campaigns ever has effectively come to an end in the US, while upcoming inflation and (especially) labour data should take even more pressure off Powell and his colleagues and 3) corporate India possesses underappreciated earnings tailwinds that will keep EPS more resilient than anticipated.
Do you have an overweight rating on domestic-focussed sectors than exports?
Yes, we do prefer domestic-oriented business over exports as we believe that the domestic economy is likely to be more resilient than the global economy. India’s economy is unlikely to face any major disruptive impact as India’s demand drivers, inflation is well placed. I continue to believe that India is poised to enter a high growth phase in the second half FY24.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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