For banks, "FY24 credit growth is expected to be slower than FY23 but still healthy at around 13 percent," Hemant Kanawala, Senior Executive Vice President & Head Equity at Kotak Mahindra Life Insurance Company, says in an interview to Moneycontrol.
He feels margins should remain stable in FY24 over FY23 for the full year, and credit cost is also expected to remain benign. Hence, banks can show double digit earnings growth in coming quarters, he says.
If the US dollar may come under pressure due to high fiscal deficit and inflation, then all risk assets such as emerging market equity and debt and gold will do well, he believes.
From India’s perspective, Kanawala, with experience of more than 15 years in fund management industry, says equities look attractive after 18 months of consolidation and valuation converging with long term averages.
Q: Do you expect one more disappointing quarter (Q1FY24) for frontline IT companies after lower-than-expected earnings in Q4FY23? Also, will midcap IT companies perform better than frontliners in coming quarters?
Although some IT companies have guided for a sequential growth despite the near term softness, June quarter could be weaker than the March quarter for most companies. This weakness can be attributed to project pauses and cancellations in the US and select verticals such as banking and communications.
The pause and cancellations materialised in February and accelerated in March. The full impact of this will be visible in the June 2023 quarter.
The general perception is that large-caps will outperform mid-caps in a challenging environment. We believe that select midcaps can do better than the frontliners but demand has slowed down and will impact both tier I and midcap companies.
Q: What is the best asset class for investment in FY24 considering the global and domestic environment?
We are looking at a scenario, where after a decade of strong performance, the US dollar may come under pressure due to high fiscal deficit and inflation. If this scenario plays out, then all risk assets like emerging market equity and debt and gold will do well.
From India’s perspective, equities look attractive after 18 months of consolidation and valuation converging with long term averages.
Q: Do you think the value is beginning to emerge in export themes?
External environment continues to remain challenging and hence demand remains subdued. Although prices have corrected, there are risk of earnings downgrade in IT and textiles sector due to demand slowdown.
For pharma, both competitive intensity and regulatory issues remain a big concern. Hence investors need to be selective in taking exposure to export themes.
Q: Which are the sectors that can generate huge alpha going forward?
We remain constructive on domestic economy. Government has put lot of emphasis on reviving investment cycle in India, which will help banking and capital goods sector. Chemical sector is seeing benefit of manufacturing shifting from China to India and can offer multi-year growth opportunity.
Q: Do you think the consumption will remain a tale of two halves?
Consumption has been impacted by high inflation and slowdown in rural economy. Government’s focus on investment should generate more jobs, which in turn will give boost to consumption.
Also we need to keep track of monsoon, which can impact rural demand. Hence we may see pick up in consumption in second half.
Q: What is your take on the latest Federal Reserve policy meeting, and do you see signs of a big pause in interest rate hike cycle?
US Fed has increased rates by 500 bps in last one year and they believe that effect of the same will be seen in the economy in next six months. They started raising rates because inflation was in high single digits.
Currently, wholesale price inflation has come down due to softness in commodity prices but core inflation still remains sticky due to strength in labour market. Hence, future course of action will depend on incoming data of inflation and GDP.
Q: Will banks continue to see healthy earnings growth in coming quarters, especially after reading the Q4FY23 numbers?
FY24 credit growth is expected to be slower than FY23 but still healthy at around 13 percent. Although margins will trend down from strong exit rate of FY23 due to rise in cost of deposits, it should remain stable in FY24 over FY23 for the full year. Credit cost is also expected to remain benign. Hence banks can show double digit earnings growth in coming quarters.
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