Auto has come back in a big way with a good product mix, strong pricing power, a robust order book, and a stable regulatory environment, while pharma has seen a turnaround, and banks have generally been good so far, says Srikanth Subramanian, CEO at digital investment platform Kotak Cherry, during a freewheeling chat with Moneycontrol.
In fact, these are the three sectors in favour this Diwali 2023, says the expert seasoned for over two decades in the equity markets. The markets, he thinks, have come to terms with the higher-for-longer interest rate regime for now, but the rates have peaked out on the US shores. "Unless there are any shocks on the geopolitical front, the expectation largely is that the most aggressive rate hike cycle seems is over," he says. Excerpts from the interactions:
Is the market done with the correction, considering the risk factors?
The markets suffered volatility on account of risk-off sentiment around the world. The risk-off sentiment was on account of two major events- the Israel-Hamas conflict and the US treasury yields. The Israel-Hamas conflict is still an evolving situation and the risk of it becoming a full-blown middle eastern war is still there and if that happens, it could trigger a flight to safety for foreign investors, see the oil prices going up, and hampering both the currency and the fiscal deficit of the country, leading to a potential weakness in the market.
As far as the US bond yields are concerned, the uptick was on account of two things: monetary and fiscal. The fiscal aspect, which is the overall budgetary behaviour in the US, will not turn overnight and isn’t dire as everyone had feared but as far as the monetary part is concerned, the worries of further rate hikes have subsided for now after the US Fed decision and Jerome Powell commentary.
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Having said the Nifty is still trading at PEs lower than 10-year averages on both trailing 12-month and forward basis with ROEs (return on equity) at record highs but the midcaps and smallcaps are expensive. In such cases when the valuations heat up a lot, even a small nudge can lead to market correction.
For the market to continue its price trajectory, economic growth will have to stay resilient, inflation will have to go as per the RBI's choice or it could lead to tightening and the outcome of the elections will have to be favourable for the economic policy making of the country.
Sectors on your radar this Diwali...
Auto has come back big time with a good product mix, strong pricing power, a robust order book, and a stable regulatory environment. Pharma is another sector that has seen a turnaround with consolidation happening in the export markets and companies able to build margins in their pricing. Banks have generally been good so far but NIMs (net interest margins) have compressed. That said, credit costs are expected to be in check with healthy levels of provisioning and this along with operational efficiency will bolster the bottom line for the banks. For me, these are the three sectors in favour this Diwali.
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Is Fed meet outcome in line with your estimates? Your take on the economic growth assessment...
The Federal Reserve held on to the key policy rates at 5.25-5.50 percent for the second time in a row. The data on October seems to have dictated the outcome - GDP growth stronger than anticipated, decrease in month-on-month CPI print, in-line increase in Personal Consumption Expenditures (PCE), strong housing sales, etc. pointed to a resilient economy and monetary policy that seems to be working.
If you consider the unemployment numbers and payroll print that came out on November 3, the labour market too seems to be easing a bit. The effects of monetary tightening takes a while to manifest, so it’s prudent on the Fed’s part to wait and watch.
Fed's Powell, however, highlighted that the economy right now is “strong” but took a clear stance that the Fed’s outright objective is to bring and keep inflation within the 2 percent target, even if it means a slower economic growth.
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Do you expect one more rate hike by the US Federal Reserve? What about the possibility of interest rate cut cycle starting in the mid of 2024?
Ceteris Paribus (all other things being equal) looks unlikely for now. Considering the trajectory of the economy and the inflation highlighted by the data points, the Fed is more likely to take a wait and watch approach than to go on aggressive and carry out another rate hike.
If the Fed can still succeed in a soft landing, that would be a dream outcome for everyone. The soft landing would ideally mean a robust economy and a lower inflation which right now seems to be panning out.
The markets have now come to terms with the ‘higher for longer’ regime for now but still think that the rates have peaked out. Unless there are any shocks on the geopolitical front, the expectation largely is the most aggressive rate hike cycle seems to have gotten over for now.
A rate cut will depend on how the combination of the economy and inflation trajectory develops. If the economy is strong and the inflation comes out lower, the Fed might want to go slow on rate cuts but if the inflation becomes manageable but the economic growth has tapered off, the central bank will have to be aggressive in rate cuts to give impetus to the economy.
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Do you expect the economic growth to be lower than 6.5 percent forecast by the RBI for FY24? What will be the risk?
RBI governor came out saying that GDP growth for the September quarter will be higher than 6.5 percent which is also the RBI estimate for the quarter. IMF recently made an upward revision in the growth rate to 6.3 percent from 6.1 percent for FY24. Growth in the economy is a function of consumption expenditure, Investments, Government spending, and the trade balance.
Now consumption demand is still strong if you consider the overall levels but there is still some pain in rural demand given the effect of deficient rainfall and increasing unemployment. Even when you look at the results published by auto and consumer companies, rural demand still seems to be a problem.
Loan growth is trending at ~19 percent which is a good sign as far the investment activity is concerned. The cash balances with the government increased in October but is likely to get used up as the government expenditure now picks up the pace given that the elections are just around the corner.
The trade deficit is about $40 billion till September 2023 which is roughly 1.3 percent, approximately half of what it was last year in the same time frame. So if you look at it, the only major risk that remains is the rural demand plus some weakness in the Manufacturing and Services sector as the latest print in PMI has come out lower than expected- it could be an aberration but is yet to be seen.
Any slump in manufacturing activity and infrastructure development will stop the multiplier effect that has been set in the economy and could be a major risk to the growth rate. Right now, if you ask me the growth projection seems reasonable and achievable.
Disclaimer: The views and investment tips expressed by investment 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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