Daily Voice | It's time to gradually exit commodity-linked stocks, says Abhay Agarwal of Piper Serica

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Global funds have increased their cash allocations to 6 percent over the last quarter from 5 percent earlier. This is one of the largest cash holdings over the last decade. All emerging markets have seen this outflow because the global funds are reducing risks till the impact of the Ukraine war situation and rising inflation becomes clear.

So, the FPI selling in India is not only because of premium valuations. We expect Indian markets to continue to trade at a premium because of higher growth and larger size. We believe that the FPI flows to India will become positive only after global funds look to get back into risk assets.

Is Fed rate trajectory still a risk for the equity markets?

The inversion of the yield curve in the US is worrying traders as it typically indicates an impending recession. Therefore, there is still a lot of uncertainty around the rate hike trajectory. If the Fed is too aggressive, it would hamper the nascent economic recovery.

We believe that the Fed will choose growth over inflation in the near term. At the same time, there is some hope that with supply chains improving, the incremental supply will cool off the commodity prices, especially crude. The markets are currently building in four rate hikes this year. Anything beyond that will be negative for the markets.

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IT majors have come up with their financials. Do you think this is the time to invest in IT stocks? And, do you see any impact of the Fed rate trajectory on the IT space?

The results from TCS are quite encouraging. They showed that the company is now using its size to its advantage by getting the mega-deals that are valued at more than $1 billion. For the IT majors, their large size will become a competitive advantage as only the large companies are invited to bid for mega projects.

There are near-term challenges in the form of high attrition rates of more than 17 percent and rising costs. However, we expect the IT majors to continue to grow in the early double digits over the next five years without diluting their margins.

At the same time, the valuations have run up and are pricing in this growth. Therefore, short-term traders may be disappointed while long-term investors should allocate 10-15 percent of their portfolio to the IT majors to achieve steady long-term returns.

We do not expect the demand environment to be impacted by the Fed rate hikes. The demand for IT services is extremely robust and the commentary from industry leaders has been quite positive.

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Is it the right time to bet on commodity-linked sectors?

We believe that the peak of the commodity cycle has got extended already because of major supply-side disruptions. As supply chains improve and shipping and logistics normalise, we expect to see the commodity prices cool off over the next quarter. Therefore, investors who are looking to benefit from a spike in commodity prices are already late to the trade. Our advice to investors who have already made money from commodity stocks is to start exiting these stocks over the next couple of quarters.

Do you expect volatility and rangebound market to impact primary market sentiment as so far only six IPOs were launched in 2022?

Most of the large IPOs over the last 6-9 months have massively underperformed. Many are down more than 50 percent from the issue price and there are no signs of any recovery. Therefore, despite the recovery in the secondary market, there is very tepid demand from investors for new offerings, especially of high-priced offerings from high-growth companies in the consumer tech space.

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The sentiment seems to be of buying the stock after listing rather than chase listing gains. We expect the market to be very receptive to reasonably priced IPOs by companies with stable cash flows. Excluding the mega IPO of LIC, we still believe that the IPO market should be able to raise Rs 1 lakh crore in the current financial year.

Is there any possibility that India's growth can be below 7 percent for the current financial year? 

It is doubtful that the growth will be below 7 percent since the base is already low. We are expecting a close to 9 percent growth. The risks to that growth are new lockdowns and escalation of the Ukraine war situation. Other than that, we are seeing very robust domestic consumption demand that should lead to a close to 9 percent growth.

What are your thoughts on the banking and financial services space as we are soon entering into rate hike cycle?

Large banks are typically able to increase their margins in an environment of rising interest rates. The lending rates are increased immediately while the deposit rates are raised with a lag. Therefore, we expect the immediate impact of the rate hikes to be positive. At the same time the risks in lending go up because of higher defaults and that shows up later in form of higher credit costs.

If the rates move up, too, sharply there would be a lasting impact on the credit demand that would slow down the lending business. Therefore, our return expectations from traditional large banks and NBFCs are muted with a 3-year view.

We believe that more nimble and innovative smaller banks and NBFCs will outperform the large banks over the next three years.

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