Daily Voice | Banks an excellent pick for earnings upgrade, but two sectors to see downgrades if recession appears, says this investment advisor

Our market has been the most robust over the last year and is at a much higher valuation multiple than many emerging markets. For example, the valuation ratio for the Nifty is running at a 134 percent premium. But we are not in the overheated zone if you look at the PE ratio compared to historical values.

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The US Fed has been very aggressive in its fight against inflation by hiking interest rates. However, they would compromise on growth in the economy for inflation. As the inflation in the US has cooled slightly but is still nowhere near the target rates, the rate hikes continue and be a concern for growth.

While India still has the highest projections globally in terms of growth, the impact of slowing growth has already been felt in India, so in the scenario of slowing growth, many might call the robustness of prices in India a little overheated.

Also, is the market pricing in expected growth concerns due to the likely global recession next year?

The growth concerns are not priced into the market prices, but the rupee tells another story. The valuation multiples that the Nifty is at are not the numbers that hint at a likely escalation but, in fact, hint at solid growth.

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The Nifty deserves to command a high multiple for several reasons - India becoming an alternate manufacturing destination for the world, India leading in the public digital and financial infrastructure space, domestic focus on job-creation and ease of doing business.

The RBI in fact still expects India's growth to be 7 percent next year, and the world bank looks at 6.9 percent growth, but these numbers could be impacted if the recessionary fears in the world escalate.

Do you think the earnings growth will likely be impacted due to a possible recession-led cycle? Hence do you expect earnings downgrade going ahead?

The Indian economy coming out of the pandemic will remain resilient. As inflation eases, many sectors, especially domestic consumption, travel, and hospitality, will remain buoyant. Banks have come up strong with rising credit growth and much more robust balance sheets, and they will flourish in a rising interest rate environment.

In a growing economy, we import more, but the exports will suffer as global growth slows down, and this will cause concerns. In a worldwide recessionary environment, sectors whose earnings are linked more to the global market, like Pharma and IT, will be impacted and see downgrades.

If there is an earnings downgrade, then which sector(s) will see earnings upgrade?

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As I said, banks are an excellent pick for an earnings upgrade in a rising interest rate environment even though the Bank Nifty is, in fact, the most heated sectoral index at the current junction. This is because domestic consumption will continue to be robust even if global growth slows down, and in a lower inflationary environment, the margins will expand and could see upgrades.

In addition, domestic capital goods and manufacturing are still seeing upgrades as the capex cycle remains robust, and they continue to benefit from PLI (production linked incentive) schemes. So we could see good numbers there as well.

Is the debt market looking attractive for investment compared to equity?

Debt has increasingly started looking attractive as interest rates have risen. The long-duration rates might have little demand as the rates will not be this high for too long, but the short to medium-duration debt is quite attractive.

As a result, we are seeing a lot of buzz all around about debt products, which is a direct function of the attractiveness of the debt market in a rising interest rate environment.

Considering more than 2,000 points fall in IT space from a recent swing high, do you think it is an excellent opportunity to buy IT names now, or should one wait?

The IT sector has had a great bounce back from the lows as the US market has flourished. But there is still growth concern in the space. As we saw with HCL Technologies recently, the global slowdown is sending warning signs and lower projections for the IT sector.

From a valuation perspective, the IT sector is still attractive. Still, given its immense dependence on the global economy, we should be careful for this sector while the global economy struggles with inflation fears.

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