"We maintain a positive outlook on banks due to their improving performance, including higher credit growth, stable NIMs, low credit costs, and better return on assets," Vinit Sambre, Head of Equities at DSP Mutual Fund, says in an interview to Moneycontrol.
Banks are often considered a reflection of overall economic growth, so they should benefit in an economic recovery scenario, he believes.
Large-cap IT companies' valuations are more reasonable than some mid-cap names, making it a good opportunity to invest with a long-term perspective, says Sambre, who specialises in the small- and mid-cap space and has over 16 years of relevant work experience.
What are the two key risk factors now as expressed by you in the annual note?
Two significant risk factors to consider are the potential for interest rate hikes and a slowing growth environment. As interest rates rise, it can lower the value of assets as the future cash flow from any assets gets discounted at higher rates. We saw this play out in 2022 when a sharp increase in interest rates led to market declines across most asset classes.
Another risk to watch out for is a slowdown in growth, as there are signs of sluggishness in certain areas of consumer demand. If growth does not improve, this could lead to downgrades and negatively impact equity valuations, particularly when they are already high.
Which are the three important things that you would like to advise to make the investment journey better?
While it is natural to speculate on the future movements of commodity prices, central bank policies, liquidity levels, and the impact of Covid-19, it is important to recognize that these factors may not have significant bearing on the success of most investors. Instead, what has often made a difference is avoiding a significant mistakes at a pivotal moments, maintaining an investment discipline, and accepting that higher equity returns come with a certain level of volatility.
Hence the advise we have for investors is as follows - it is not prudent to exit the equity asset class when valuations are high. Instead, it is important to be pragmatic and recognize that future returns could be lower when an asset is purchased at a higher price than when it can be acquired at a lower price. It is important to rebalance portfolios so that you have the appropriate mix based on your goals and risk profile. Having the right expectations, maintaining discipline and being patient can take you far in your investing journey.
Do you expect a sharp rally in equity markets this year if there is shallow recession in the world's largest economy?
It's challenging to predict market movements this year due to the rapidly changing variables. However, as previously mentioned, a good approach would be to stick to your asset allocation strategy, maintain discipline, and invest for the long term.
Do you think China's growth will pose challenges for Indian markets?
Like we have mentioned in our note that while it is possible that other emerging markets may outperform in the short term due to their attractive relative valuations, it is important for investors to take a long-term view and consider the structural growth opportunities present in India. In comparison to other emerging markets, India also offers greater clarity in terms of government policies and commitment to growth-oriented reforms.
Have you seen any surprises in the IT companies' results? Do you expect the bottoming out process is underway in the IT sector?
IT companies' results have generally met or exceeded expectations, as they have been successful in preserving margins. Large-cap IT companies' valuations are more reasonable than some mid-cap names, making it a good opportunity to invest with a long-term perspective. However, there is a chance of further valuation cuts depending on the severity of the recession in the US.
What do you make out of banks earnings announced so far? Do you see any challenges for the sector in coming quarters?
Banks have reported strong earnings, with many experiencing good loan growth backed by an expansion of net interest margins (NIMs). While we anticipate this trend to continue for a quarter or so, there may be pressure on NIMs as deposit costs rise.
Despite this, we maintain a positive outlook on banks due to their improving performance, including higher credit growth, stable NIMs, low credit costs, and better return on assets. Banks are often considered a reflection of overall economic growth, so they should benefit in an economic recovery scenario.
Do you expect major consolidation in the cement sector after an entry of big player? Is it a must own sector?
The entry of a major player with significant aspirations may lead to consolidation in the cement industry. As the new player competes for market share, other companies are increasing production in an effort to protect their position, potentially resulting in oversupply. Despite this, we are still interested in having exposure in this sector as it offers a way to profit from infrastructure growth in the country, although we are being bit cautious in our outlook in the near term due to pressure on profitability of cement players.
Do you believe the Federal Reserve will end the rate hike cycle in first half of CY23? Do you see any possibility of rate cuts in the second half?
The possibility of a rate cut will depend on the trajectory of economic growth, but it is a possibility that we will have to evaluate as more information becomes available.
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