After spike in inflation for June, Anil Rego, Founder and Fund Manager at Right Horizons PMS told Moneycontrol that given the effects of the monsoon, they might see some volatility in inflation in the coming quarter or so.
However, "we do not believe the inflation might be a cause for concern from a markets point of view," he says.
The chartered financial analyst with around three decades of experience in the equity markets expects the bull run to continue. "Valuations for large and mid-caps are near long-term averages, while small & micro caps are relatively undervalued. Quality names in this segment offer better risk-reward opportunities over the next two to three years," he says.
Q: Are all the negatives priced in by technology space? Do you advise your clients to accumulate space?
The earnings for the IT sector have been volatile over the last 1 year, given the global headwinds which are present. Although markets look to have considered all the negatives, we believe there remains some amount of uncertainty. Tech MNCs have been taking to layoffs to reduce the impact of rising costs in the US.
With the challenges like high inflation, interest rates and banking crisis in the US and European regions, we must wait and watch for the IT sector. Order flow and slower execution of current orders seem to persist as long as there is a slowdown and global growth remains uncertain. So, if one were to ask if the markets have priced all the negatives, we would like to assert that some uncertainty remains, which might not be accounted for.
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However, such situations also present opportunities where fundamentally strong picks might be available at attractive valuations. With the pause on interest rate hikes, the expectation of the sector improving in the second half of FY23-24 improves. Hence, there might be opportunities that might be attractive in the long run.
Q: Will food inflation be a major concern in India going ahead?
Inflation has been relatively higher for India compared to other countries, given that we are a supply-oriented economy and a growing economy. However, the RBI has effectively brought the rising inflation under control sooner than other developed Economies.
With the monsoon in effect in India, there will be some volatility in inflation, given the effects of the monsoon. Hence, we might see some volatility in inflation in the coming quarter or so. However, we do not believe it might be a cause for concern from a markets point of view.
Q: Do you see a possibility of a growth slowdown in India in the second half of FY24?
The Indian economy has proved to be more resilient than many large economies, as per the latest report from CII. The report has also highlighted the healthy performance of key macroeconomic indicators by the Indian Economy, which along with a conducive domestic policy environment, have sustained the growth momentum in the Economy.
The CII Business Confidence Index (CII- BCI) improved to 66.1 in Q1 (Apr-Jun FY24) compared to 64.0 in the previous quarter showing positive momentum in indicators such as GST collection and air & rail passenger traffic.
With the RBI’s rate hike pause expected to bring down the cost of capital, fresh investments are expected to pick up. Capacity Utilization has been improving in India along with increased capex by the private sector. Barring a few sectors which might be impacted by global headwinds, India’s strong domestic growth implies that the Country stands out among its peers on the growth front in FY23-24.
Q: Is the financial space a good play via capex up-cycle?
The Banking space is witnessing robust credit growth momentum driven by the continued traction in the Retail and SME segments. On a segmental basis, home loans, auto loans and credit card outstanding continue to grow, and corporate loans are recovering gradually.
The investment-led economic growth is a positive for the banking sector, especially considering the healthy balance sheets of corporates and banks.
Q: Will the defence and EMS space report healthy earnings growth in the coming years? Should one keep these sectors in the portfolio?
The EMS industry has been trending due to sectoral tailwinds as the government of India’s PLI, EMC and SPECS schemes have been aiding in substituting imports to manufacture electronic components locally, and further export opportunities have presented with the China+1 strategy.
Leading EMS players’ revenues are expected to grow at 25 percent CAGR over the next 2-3 years.
Q: Your take on the US inflation announced this week? Do you expect two more rate hikes by the Fed by the end of 2023?
Inflation looks to have cooled a little bit in June 2023 in the US, with the Bureau of Labor Statistics CPI at 3 percent compared to 4 percent in May. Core CPI, which drops out more volatile items like food and energy, cooled to 4.8 percent yearly and 0.2 percent monthly. However, it might be too early to comment on whether inflation has really cooled because the core inflation figures still look sticky.
Q: Is the equity market looking expensive now?
The domestic macro data points paint an optimistic picture, and corporate profitability is growing at a healthy pace. We believe Indian companies are to benefit from a multi-decadal growth opportunity domestically that will have a multiplier effect across sectors.
We expect the bull run to continue. Valuations for large and mid-caps are near long-term averages, while small & micro caps are relatively undervalued. Quality names in this segment offer better risk-reward opportunities over the next two to three years.
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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