Daily Voice | Corporate earnings will be positive in Q2FY23 for most sectors, says this Chief Investment Strategist

Do you expect the corporate earnings season to be strong? Also what are the expected hits and misses among various sectors?

Given the strong growth all around, it is likely that earnings will be on the optimistic side this quarter for most sectors. Commodities, natural resources, oil and gas are likely to have an impact due to the price corrections in the sector. Defence and railways are likely to show strength. Financials and IT should continue reporting strong numbers.

Are the provisional numbers shared by banks and other financial intermediaries for Q2FY23 encouraging? If so, do you see a significant rally in the banking & financial services space?

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It is clear that banks are showing strong credit growth and significant improvement in asset quality. This trend should only get stronger in the coming quarters. It shows strength across sectors in the economy. Of course, Mr Market is likely to react positively to strong numbers from the banks.

Given the undervaluation in the sector, that becomes even more likely. While overall it is positive for the sector, one should be careful to study the balance sheets of financials and banks to validate one’s thinking before taking a position.

Do you see any possibility of a 10-15 percent market correction by the end of this financial year?

It is likely that the high US inflation numbers and slowing down of US GDP is behind us. If that turns out to be the case and future quarters in the US are likely to show lower inflation and higher GDP, then the Fed is likely to slow down. Based on the Fed’s dovish tone, it is unlikely that the market will correct much.

One wild card is European inflation, GDP and central bank actions. It is likely that European inflation will continue to be high on the back of high energy and food prices, while its GDP recedes. If this happens and the European Central Bank (ECB) continues raising rates, the markets could react negatively. However, the chances are that the ECB would work on some sort of quantitative easing (QE).

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On the Indian economy side, the inflation numbers are likely to keep cooling and it looks unlikely that the RBI will follow with stronger-than-expected rate hikes, except interest rate increases just to support the rupee against the Fed’s actions. Given all this background, the market looks biased more on the upside.

Do you think the IT stocks moved into the value zone, especially after severe corrections this year? Are you thinking of gradually buying in the space?

IT stocks have corrected significantly over the last year. It is a huge overreaction given the kind of growth numbers being discussed by the US cloud platform companies. These companies are guiding for 25-30 percent kind of growth in revenue. The Indian IT service companies are partners with these platform companies and derive nearly 50 percent or more revenues from digital, which is primarily cloud today.

These cloud projects are multi-year strategic projects that the Top 500 US and Global companies are likely to step up on even if an economic slowdown arrives. Thus, it looks like revenue growth for the IT companies is intact even for a slowing economic year in the US.

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Further, the digital transformation space is a multi-decadal growth vector that is still not fully understood by Mr Market. This digital transformation globally is being executed primarily by Indian IT service providers and the current valuations or even one-year-back valuations did not do justice to it.

Do you expect the Fed to be less hawkish from the next policy meeting?

The Federal Reserve has clearly said that it is going to watch the numbers closely and take data-driven decisions. Inflation has most likely peaked in the US already. Of course, the Fed needs to see clearly downward trending inflation numbers rather than just a one-off lower number.

If the number of job openings continues showing a downward trend, GDP is likely to show a downward trend, if unemployment numbers start increasing, and wage inflation looks benign, the Fed is likely to change its tone to be more dovish and also slow down significantly on the rate-hike cycle. However, the November meeting is likely to be a 75 bps hike.

The RBI, in its recent policy meeting, lowered the growth forecast for FY23 to 7 percent. Do you see any possibility of the RBI lowering the growth forecast further in upcoming policy meetings?

Given the strong economic performance and spending coming from all fronts, the Government of India, the private sector and the consumer, it looks unlikely that the RBI will lower the growth forecast. Except for a severe recession in Europe and that spilling over and driving a global recession, most scenarios look positive for India. Even a severe European recession might not be so bad for India, since it could drive energy and commodity prices relatively lower and thus improve the situation for the rupee and Indian imports.

In fact, it is likely that by the end of the financial year, the RBI might start upgrading growth forecasts for the next year, as the US interest rate hike, GDP downcycle, and European winter uncertainty is likely to be behind us.

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