ITUS Capital founder and fund manager Naveen Chandramohan believes India is entering a new economic cycle marked by a shift to supply-side growth, which typically begins with increased public capital expenditure.
And to make the most of this cycle, Chandramohan says investors should position portfolios towards businesses set to gain from supply-side growth rather than focusing on timing the market.
Chandramohan, who has more than 16 years of experience in the financial markets, doesn’t see India slowing down and in an interview to Moneycontrol, he identifies five sectors that look promising. Edited excerpts:
Do you think we are in a long-term bull market similar to the 2003-2007 period? And, in the short term, will it be prudent to take the money off the table after the recent run?
India has traditionally been an attractive market for global investors seeking growth opportunities. However, the past decade (2010-2020) witnessed sluggish growth with sub-par GDP performance, particularly impacting old-economy industries. This period can be considered a lost decade for many such industries. The driving force behind this phase was demand-led growth, primarily fueled by a consumer base with strong financial standing and limited debt.
Currently, we believe that we are entering a new cycle characterised by a shift to supply-side growth, which typically begins with increased public capital expenditure. Rather than focusing on timing the market, it would be prudent to position portfolios towards businesses poised to benefit from supply-side growth in the early stages of this cycle.
Promising sectors include manufacturing, auto-ancillaries, contract development and manufacturing organisations (CDMOs), as well as research and development and process engineering-focused enterprises.
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What is your take on the financial services business after the demerger of Reliance's financial services business? Is the financial space a good play via capex up cycle?
The demerger is significant from the point of view of value-unlocking. It creates a focussed management and an ability to create a significantly diverse shareholder base. In terms of the sector, the credit cycle is on the uptick and the demand for credit currently is growing in the low double digits. This creates a significantly large market, which means competition is going to be significant.
However, the financial space is cyclical (especially the lending bucket) as credit cycles go through periods of boom and bust through the quality of the assets. If one pays attention to this, then owning businesses in the sector at the right valuation becomes extremely important. There are stock-specific bottom-up opportunities that offer value but I would rather play the capex cycle through manufacturing than through the second-derivative, which are the financials, we continue to be underweight on the sector.
Do you expect a slowdown in the coming couple of quarters, especially after further policy tightening by the US?
I would look at the current US cycle from two lenses – the consumer and the corporate. This would also explain why we may have averted a recession and faced a soft landing instead. The consumer in the US has significantly de-levered and the Covid handouts given ensured that the balance sheet of the consumer is strong.
Now, the consumer is back in the market for employment and the jobs report continues to be strong with a low unemployment number. The corporate balance sheet has de-levered for a good part of 10 years in the US and many corporates borrowed long in the era of low rates to buyback their equity. The third cog in the wheel is the government, and this is where the balance sheet has got inflated. Moreover, the US has indicated that it will continue to spend on infrastructure by increasing the debt limit.
The only way forward for the government is to inflate its way out of the debt on the balance sheet. This is, what I believe, you will see over the next five-six quarters. Normally, this would put the brakes on the economy but with a strong consumer and a strong corporate balance sheet, I do not see an imminent economic slowdown just yet. I continue to maintain that as manufacturing moves out of China, into the rest of the world, this will be inflationary in nature.
Do you see some possibility of a slowdown in India in the second half of FY24?
Here again, with the above as the global macro, I do not see a slowdown in India. In fact, I see the flow of capital favouring strong capex leading to manufacturing-led growth. I believe we will continue to see strong supply -side growth in India, which will benefit many of the old-economy businesses.
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Will further rate hikes by the US Federal Reserve pressure the rupee?
I do not see a 1-1 correlation between the two just yet. The level of the INR is going to be determined by the interest rate differential but other aspects not limited to our BoP, FX reserves, strength of the US $, and the impact of crude. Considering the macro favouring India on all of the above counts, I believe INR will see a strengthening trend than a weakening trend in the medium term.
Has the the earnings downgrade cycle ended for the IT sector, considering the recent run-up and June quarter earnings by the biggies?
IT is one sector where the fundamentals continue to be murky. Globally, too, technology companies have shown earnings growth through cost management than through core structural earnings growth.
India, too, is going through a very similar trend. The net additions in staffing continue to be muted and the order visibility does not seem clear. The counter-balancing aspect for an investor to this is the valuations have reverted to mean. We do not have exposure to the services part of IT but continue to own the capex spend of IT in the ER&D space.
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