"I don’t think most of the headwinds have been fully priced in by the equity markets," said Manish Sonthalia, Director and Chief Investment Officer at Emkay Investment Managers, in an interview with Moneycontrol.
He highlighted three major headwinds facing the markets, including geopolitical uncertainties. "Situations like Ukraine-Russia or Israel-Hamas are still highly unpredictable," he noted.
Sonthalia holds a contrarian view on the IT sector and remains a buyer. According to him, valuations of IT companies currently offer a sufficient margin of safety for investors with a medium-term perspective.
Do you believe the risk reward for the banking sector is strong? Do you believe PSU banks and power stocks are still great segments to keep in a portfolio?
Yeah, I think the banking sector will do quite well because of a very generous front loaded rate cut that we have seen from the Reserve bank of India. 50 basis point was not expected plus a very high dose of liquidity through a 100 basis points cut in CRR. This is likely going to benefit the banking sector and the NBFC through pick up in credit growth plus I think banks will be able to defend their margins on incremental lending book because of yields realised on CRR.
The PSU banks will also do quite well because they have a large bond portfolio which will be marked upwards because of mark to market gains and also due to pick up in growth rates plus cheap valuations. So net net, I think the risk is to reward for the banking sector and the NBFC sector is quite favourable.
In the power sector, I would be bullish on the transmission and distribution side. Not so bullish on the module manufacturers or wind turbine players. The main concern in the power space are the valuation of companies. So if valuations are permitting, I would look at transmission and distribution companies more favourably.
Is India in earnings upcycle currently?
100%. So whole of last year the earnings growth of the Nifty 50 is 2 percent or between 1 percent and 2 percent. Obviously FY26 is going to be at least 10 percent if not more. And now that we have got a front loaded reduction in interest rates and plenty of liquidity in the system and hopefully if there is no adverse impact of the tariff that is going to be announced on July 9, we should be in for a significant earnings uptake vis a vis FY25. So FY26 would definitely be higher than FY25 to the extent of 10 to 12 according to me vis a vis 2 percent last year.
And do you believe most of the headwinds have already been discounted by the markets?
No, I don't think this is. The markets are rallying not because the headwinds have been done away with. But because, I think the markets will overshoot fundamentals in the short term because of massive dose of impetus on account of reduction in the CRR and reduction in repo rate.
Of course there are three major headwinds. First is what is going to be the impact of the tariffs? That's not known as of now. Second is basically what are the geopolitical issues going to look like. Operation Sindoor or you know, or other skirmishes that we are seeing. Ukraine, Russia or Israel, Hamas and all of that particularly not known. And third is basically what is the impact of all these global micro and macros on inflation and currency and resultant inflation and commodity prices. Because if we are in for these sort of things.
Except for this, everything else pretty much is favourable for India, at the moment.
Do you think the underlying trend in the auto sector is expected to remain muted for a few more months?
Yes, I think the auto sector is somewhat headwinded because of the scarcity of rare earth materials and magnets and you know, magnets which is basically by and large prerogative of China. And if magnets don't come to us then we will have to scout for alternate supplies which will take it's own time that May take its toll on auto manufacturers. There can be specific positives for companies for auto component companies but the space is head winded.
Do you think that as long as the conundrum around the US economy continues, large cap IT companies may underperform?
I don't think so. I think the IT companies broadly, both the large caps and the mid caps are discounting the worst case possible situation in terms of growth in their valuations because of probabilities of US recession. According to me, there is enough margin of safety in IT companies valuation if you think slightly for medium term. I have a contra call on IT and am a buyer.
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