Daily Voice: Focus on these 3 sectors for rest of current financial year, says Epsilon's Tushar Pradhan

The Nifty IT index has had a smart performance in the past 3 months (up approximately 17 percent) and in the past 6 months (up approximately 20 percent) and up 31 percent from the low seen in June this year. The components in the index of 10 stocks are overly weighed in the favour of 2 heavyweights i.e. Infosys and TCS. While Infosys has moved up smartly 35 percent from the low in June, TCS and HCL Technologies the other two heavyweights have moved up 18 percent and 33 percent respectively. Interestingly the P/E’s have moved up for these companies by a factor of almost 7 points, and they now trade at a premium valuation compared to its average over the past 3 years.

For this index to deliver 15-20 percent from the present levels assuming the current higher average P/E, future earnings growth has to come at 20 percent compounded at least for the next 4 quarters. While there are certain indications that demand will remain buoyant, the possible slowing down of the US economy and an uncertain political environment may put a spanner in the works to this scenario. We have seen sector rotation in other areas and hence it will be wishful thinking at this time to expect continued performance in this index.

Will the gold be a real star among commodities and give over 20 percent return by 2025?

Gold internationally is an asset class that is favoured for its non-correlation to financial markets and as a safety asset class in the face of uncertainty in global markets. However, having said that it is useful to remember that gold as an asset class does not provide any intervening cash flows and has physical storage issues if not procured in an ETF format. The predictability of returns in this asset class depends on the demand factor given financial markets and the ability to expose oneself in any meaningful manner to it.

Is the market looking little exhausted? Do you think the market needs to cool down by 10 percent from here on?

Markets are a collective phenomenon based on many factors. It would be premature to label it “exhausted” at this time. Markets do not follow any rational path of cooling down when one wishes it do so, nor does it go up because we wish to see it go up.

Do you see an unstoppable rally in the pharma space in the coming quarters?

Pharmaceuticals as a sector has seen a sharp rally in the recent past, however, one has to understand that this sector has not participated in the broad market rally in the post-COVID era. While all other sectors performed well, the sharply lower volumes especially in the anti-infectives, and the overall slump in pharma spending caused this sector to underperform. However, it has caught up in recent times and valuations are in line with longer-term averages. Earnings growth especially in US generics is expected to remain strong and companies focused on this space should see margins expand.

Do you expect a further drop in oil prices? What does it indicate?

Oil prices globally are a function of demand and supply and the expected slowdown in the US, its diversification into non-OPEC sources of supply, and the overall demand reduction are causing the current drop in prices. Continuing slowness in demand should temper prices even more in the near future. A drop in GDP growth rates in China too adds to the overall demand for crude and can keep prices in a range for quite some time.

Which are the likely star performers (among sectors) on your radar?

Domestic manufacturing, discretionary, and rural consumption look very promising for the rest of this financial year from an intermediate perspective.

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