“Electric vehicles and renewable energy solutions are here to stay, but may yet have a long way to go before reaching the inflection point in India. We would be cautious about investing in the power sector for the reason of larger demand from electric vehicles,” Nimish Shah, Chief Investment Officer - Listed Investments at Waterfield Advisors, said in an interview to Moneycontrol.
He feels banks could see some margin compressions over the next few months if interest rates increase. But, “from a long-term perspective, a 20-25 percent exposure to the financial sector across banks, NBFCs, and insurers should be ensured,” he said. Edited excerpts:
Where do you see value now, given the volatility in the market and sharp run-up in several stocks?
It's prudent to look at stock-specific investments rather than investments based on sector attractiveness. There are many good stocks that have not seen a run-up. These stocks may be from sectors that are overvalued or from business segments in a growth sector where they hold a good market share.
Some value stocks merit attention as the underlying businesses have strengthened and their dividend yield provides a good buffer on the downside.
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Do you expect enormous opportunities in the real estate space in the coming quarters?
Real estate is a complex game divided between various segments such as residential, commercial, warehousing, and land. Within these segments, the price movement is largely based on micro-area level parameters like demand, supply, and unit sizes. Real estate stocks are also slightly more difficult to evaluate as company valuations depend on market rate assumptions, which in turn could differ widely.
While the revival in the Services sector has indeed increased demand for commercial real estate, it remains to be seen how increasing interest rates can impact demand. Industrial and manufacturing sectors are witnessing volatility due to geo-political issues, and hence, there is uncertainty on continuity of demand from the segment.
As for residential segments, affordability is an issue in market segments where there is good demand. Most good quality micro-markets have seen a time correction rather than an increase in rates. Investing in REITs (real estate investment trusts) gives investors the advantage of earning the rental yield plus capital appreciation of the underlying pre-leased real estate investments made by the Trust.
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What is your take on the power sector and should one have these stocks in a portfolio considering the increasing focus on EVs, renewable energy, etc?
EVs and renewable energy solutions are here to stay but may yet have a long way to go before they reach the inflection point in India. The reasons are varied, and we have a long way to go, as our dependence on coal for power generation, is large.
We would be cautious about investing in the power sector for the reason of larger demand from EVs. Even otherwise, the power business is capital intensive with the added disadvantage of cyclicality that leads to low return on equity (RoE) and high volatility. We would be very selective and look for ancillary companies in the EV and renewable energy sectors.
What could be your contra bets that can deliver enormous gains in the long run?
Value investing could be one such bet and some allocations can be made in the portfolio to value stocks/fund managers.
What would be the bigger risk for the market, going ahead in FY23 - earnings, Fed move, inflation or unknown?
Currently, the geo-political uncertainty remains one of the largest short- to medium-term risks to the world economy. Growth forecasts are already being revised downwards across developed and developing nations. Some countries risk falling into a mild recession in the next few years.
Over and above this are rising inflation and interest rates which have derailed world GDP growth. Investors need to keep a keen eye on further downward movement in earnings and upward pressure on rates.
Do you still see value in the banking and financial space?
Banks could see some margin compressions over the next few months if interest rates increase. But, from a long-term perspective, a 20-25 percent exposure to the financial sector across banks, NBFCs, and insurers should be ensured. For India's growth story to play out effectively, the BFSI sector will continue to be a dominant share of broad-based indices.
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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