Vinit Sambre, Head-Equities at DSP Mutual Fund favours the banking sector due to its reasonable valuations, strong balance sheet quality, and its close alignment with the overall stable economic growth.
He is also positive about the healthcare sector, given its sustainable low teen growth, strong cash flow generation, and a superior return on capital employed (ROCE).
According to Vinit, who specialises in the small and mid-cap space and has over 16 years of experience in research and investment advisory, the IT sector has faced some challenges recently, but he believes it is well-positioned to benefit over the next 3-4 years from the emerging opportunities in AI and digital transformation.
Is the risk reward favourable for banks?
The risk-reward profile for banks appears to be favourable at present, largely due to reasonable valuations. The sector is facing some headwinds like peaking margins, moderating credit growth and emerging risk in asset quality could lead to short-term.
Despite these headwinds, the long-term outlook for banks remains positive. As economic growth continues and private sector participation increases, there is room for credit growth to rebound, providing banks with new lending opportunities.
Institutional investors have also reduced their holdings in some banks, which, while a short-term negative, could provide an opportunity for these institutions to re-enter and replenish their positions at attractive valuations. As the sector stabilizes and some of the current headwinds subside, banks could experience a recovery in profitability and growth.
Are you constructive on the power sector?
I am constructive on the power sector, especially given the surge in capacity expansion across both renewable and conventional sources. This capacity growth is expected to keep order books healthy for companies throughout the power value chain, ensuring strong business momentum for the foreseeable future.
A key driver for this expansion is the structural shift linked to the global energy transition, driven by climate change imperatives. As the world moves towards cleaner energy solutions, investments in renewable power sources are crucial, and this trend should sustain capital expenditure momentum in the sector over the medium to long term.
However, while the sector's outlook remains strong due to this visibility, it's important to approach investments cautiously. Many power companies have already seen significant valuation run-ups as investors recognize the long-term growth potential in this space. As a result, current valuations are quite elevated, which warrants a selective approach to investing.
Do you see any major risk to the market in the final quarter of 2024?
It's impossible to predict major market risks with precision, especially given the high level of global uncertainty. Unexpected events, such as six-sigma or black swan events, can often cause deep market disruptions and are inherently unpredictable.
However, based on the current fundamental metrics, the outlook for the final quarter of 2024 remains largely positive. Corporate earnings are stable, growing at a healthy rate of 13-15 percent, and the macroeconomic environment appears stable. A key driver of GDP, consumption, which was impacted at lower and mid-income levels earlier, is also expected to recover. This recovery is supported by improved income levels from a good monsoon season and moderating inflation.
Additionally, with elections coming up in several states, the announcement of various freebies and benefits should further drive consumption. On the investment front, private capex is showing signs of improvement, which could add further momentum to economic growth.
While no market is entirely risk-free, the combination of steady earnings growth, consumption recovery, and capex improvement suggests that the overall environment remains favourable, barring any unforeseen events. However, it's always wise to remain cautious and prepared for any sudden shifts.
Do you rule out the interest rate cut from the RBI in the rest of 2024?
CPI is well below the hard 4 percent target. Core- CPI has been sustainably coming down. Demand indicators are in the red- urban demand slowing and rural recovery under stress, especially with the recent high in food prices.
However, while another argument stays around the robustness of India’s GDP, it has undoubtedly been growing at a relatively higher pace, but it remains below its potential. Traditionally, the risk of high growth translating into inflation intensifies when an economy operates at full capacity. However, with India's potential growth on the rise and current real interest rates relatively high, there might be a larger cushion to absorb rapid growth before inflationary pressures emerge.
Therefore, the current conditions are conducive enough for a rate-cut cycle and have been so for quite a few months now. With the Fed cutting rates, we have enough reason ‘now’ to implement a modest rate cut, if not as steep as the Fed. RBI’s rate hikes have been less severe compared to the Fed’s, and with a shorter path to normalization, the RBI has more flexibility. This allows room for a more gradual approach, possibly beginning with a shift in stance before proceeding to a rate cut.
Furthermore, the Monetary Policy Committee is scheduled to be reconstituted in the upcoming October meeting, which opens even more possibility for a fresh perspective to the monetary policy stance.
Will the US go through soft landing?
The US economy has been slowing for a few months now. The softer labour market conditions the Fed had been anticipating for so long are now evident in the data. However, this decline wasn’t sudden; labour market softness has persisted for some time, suggesting that a sharp 50bps rate cut might have been necessary to make up for the months of inaction.
There remains a large uncertainty around the timing and quantum of the rate cut, and if this establishes into an easing cycle and not just a one-time bumper cut, there is still some reason for the economy to recover before falling over its head. However, if the labour market continues to slow down at this pace, there could be a greater possibility of the economy faltering from its current state.
What are your bets among sectors?
As previously discussed, we favour the banking sector due to its reasonable valuations, strong balance sheet quality, and its close alignment with the overall stable economic growth. Despite some short-term headwinds, the sector is well-positioned for long-term growth, making it an attractive investment opportunity.
We are positive on the healthcare sector, given its sustainable low teens growth, strong cash flow generation, and superior return on capital employed (ROCE). The sector’s resilience, coupled with favourable demographics and increasing healthcare spending, makes it a solid long-term bet.
We are also looking closely at the consumer sector, particularly in the context of a recovery. After experiencing a dull phase over the last two years, we expect consumer demand to rebound, supported by improving income levels, moderating inflation, and government initiatives aimed at boosting consumption. This recovery should benefit both staples and discretionary players.
We are closely watching the IT sector and could look to increase exposure at an opportune time. While the sector has faced some challenges recently, we believe it is well-positioned to benefit over the next 3-4 years from the emerging opportunities in AI and digital transformation. The potential growth from these trends makes the IT sector a compelling long-term investment, especially as valuations become more attractive.
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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