Higher retail participation has traditionally intensified volatility in the midcaps space. Largecaps seem more attractive at this juncture amid a prevalent nervousness on valuations, says Satish Ramanathan, CIO-Equity at JM Financial Mutual Fund.
On the Federal Reserve's next move, he feels all indications are that inflation is on the mend and that there may be other risks to the economy if rates move up higher than current levels.
"A higher interest rate increases risks of a crisis disproportionately and hence we expect actions from the Federal Reserve to be measured from here on," says the veteran finance professional says in an interview to Moneycontrol, backed by his three decades of varied experience, including asset management. Excerpts from the interview:
Do PSU banks still offer a lot of value?
In general, PSU companies are attractively valued. PSU banks have overcome their asset quality issues and are now diversifying their loan book to access retail loans as well. Most of these banks have completed upgrading their technology backend, these banks could also benefit if interest rates reduce and the credit offtake improves.
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The revival of the infrastructure sector could also help PSU banks who have traditionally expertise in lending to these sectors. That said, the PSU banks face a challenge as regards an older staff and excessive rules which dampen creativity and agility. These structural issues are the reason for a permanent discount to these stocks.
Your take on the textile sector over the medium term...
India is attractively placed in the textile sector and has a rightfully claimed a space in the fibre-to-fashion space. With a large output of cotton and number of spinning mills and demographics, India may continue to grow textile exports.
India has a large share in the home textile market and could gain market share in other segments as well. With inventory destocking in the West behind us, there are some signs of a recovery in exports. Domestic business continues to grow reasonably well and the current festive season might help in creating growth for the industry.
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What is the most interesting space in the auto and auto ancillary segment?
The auto and auto ancillary space actually has three segments: (1) Businesses not impacted by EV (electric vehicle); (2) Businesses negatively impacted by EV; and (3) Ancillary companies supplying to the EV chain and gaining traction.
India could potentially gain market share in legacy products and spares where the developed countries do not want to focus and also could gain from supplying to the EV chain. Component and software suppliers for electric vehicles are likely to enjoy a higher growth level than those supplying for ICE (Internal Combustion Engine).
Do you expect a mild recession in the US next calendar year?
It is difficult to predict timing of a recession in the US. The US economy is very resilient in the current context, and investments are increasing as companies relocate manufacturing back to America. There are signs that the real GDP is picking up pace in the US and Eurozone.
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Inflation levels are steadily declining even though crude oil prices have increased in recent times. However, there are some cracks appearing in commercial real estate market, consumer loans segment, and the private credit/equity space as well. A snowballing of these issues could lead to a sharp slowdown.
Will the Federal Reserve end the interest rate hike cycle in November?
As of now, all indications are that inflation is on the mend and that there may be other risks to the economy if rates move up higher than current levels. Smaller banks are struggling to attract deposits and systemic shocks cannot be ruled out. A higher interest rate increases risks of a crisis disproportionately and hence we expect actions from the Federal Reserve to be measured from here on.
Are you bullish on specialty chemicals?
Indian speciality chemical companies could continue to remain on a growth trajectory. India has been importing a lot of products which needs to be localized. Currently, speciality chemical companies are undergoing a midcycle correction as regards inventories and prices. Margins have declined sequentially from their peak levels and might continue to remain flat for some time.
Speciality chemical companies in niche segments may offer sustained growth with high returns on capital invested. We are selective on speciality chemicals and prefer companies that have a deep vertical knowledge and are able to exploit economies of scale.
Coming back to markets, are the valuations over-heated in broader markets and time to switch to largecaps?
Midcaps have traditionally been more volatile as the retail participation has been higher. Further, there is nervousness on valuations as well, and hence a larger allocation to largecaps may be appropriate for now.
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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