Daily Voice | Markets underpricing stronger credit growth in banking, says Anil Ghelani of DSP Investment Managers

Given the elevated inflation risk and weak global environment, do you think the RBI will hike repo rate by 50 bps in June? 

Since March 2020, most governments and central banks world over have made coordinated efforts with fiscal stimulus packages as well as monetary policy stimulus, including cutting interest rates, to help the economies wriggle out of the pandemic blues. A natural impact on the other side of such stimulus is increase in inflation which we see globally.

For us in India, the RBI has a target range of CPI (consumer price index) or retail inflation at 2 percent to 6 percent. The most recent reading was 7.8 percent which was outside this range for the fourth straight month. When we see these inflation numbers and the 'unscheduled' rate hike of 40 bps on May 4, we can get a clear message that the monetary policy stimulus could be paused and in fact we could now see a rate-hike cycle. We could see the repo rates moving from 4.40 percent towards 5 percent over the next few months. We could see a rate hike of 25-50 bps.

What are the pockets that look attractive now to buy with a medium-term perspective?

There could be good medium to long term opportunities in businesses which are dependent on local demand and consumption, rather than those which are linked to global growth or commodity prices. We could see good opportunities in sectors like Banking and Financial Services, Autos, Healthcare and some Construction Materials.

The banking segment has been an underperformer over the last three years. We have now seen credit growth beginning to pick up - for instance the annual incremental credit that the economy can absorb at the current growth rate is nearly Rs 12 to 15 trillion per annum. At this time this number is at Rs 5-6 trillion. This means that the market is still underpricing the possibility of a stronger credit growth in the banking space. The core economy is also improving at a fast clip.

The business resumption index is now hitting high readings which means the core Indian economy is back on track. A combination of healthy spending by the government as well as the private sector, normalisation in private consumption and stronger demand trend from channel checks indicate that core sectors like industrial products, cement and auto and auto ancillary are seeing gradual improvement. For instance, the passenger vehicle segment is now likely to recover from a slump which took their sales to lows seen 10 years ago.

Flows have risen quite a bit in the passive space. How do you see the segment growing and how should investors go about investing in passive funds?

In line with global trends, even in India we have seen a good growth in passive funds. Out of the Rs 39-lakh-crore mutual fund industry, ETFs and Index Funds have a share of Rs 5 lakh crore or 13 percent of the total assets under management (AUM). In my view, together with growth in the overall industry, we will see this proportion increase to 25 percent by 2025.

As an individual investor, we should not use passive funds as a competing strategy, but consider it as a complementary strategy. Invest in both active and passive funds. My suggestion would be that in the large-cap space for a core long term equity allocation, you should keep it simple by investing in low cost, passively managed ETFs and Index Funds. For some satellite allocation to small-caps and thematic funds, you should invest in active funds. The key is to define your goals and then prudently follow a regular investing approach, with inputs from your trusted financial advisor.

The most important financial goals are usually common – for most of us they are aligned to the happiness of our family, better life for children, starting or expanding a business/profession. Some of us often get preoccupied with the wrong priorities - like increasing returns at all costs or finding the next star fund manager. We could avoid this and try to keep it simple. This is not just my thinking, Warren Buffet, one of the best stock picker in the world, has made a similar suggestion – to keep it simple for his wife, in his Will he has made an asset allocation for her with 90 percent into Index Funds and 10 percent into US government bonds.

Technology is the worst hit sector in current calendar year, losing 25 percent despite a weakening rupee. Is it the time to bet on this space for portfolio?

With a global growth slowdown ahead of US and IT stocks trading at above average valuations, it is quite possible that the sector may undergo a price and time correction over the next few quarters. The long-term trajectory remains positive, but we await better valuations to go overweight on this sector. Within that broader view, there would surely be certain specific stocks within the sector which could be good opportunities in the current situation.

Do you think the Reserve Bank of India will lower its growth forecast further in June policy meeting and will that be achievable in FY23?

The RBI prediction for the economic growth for FY23 ow stands at 7.2 percent. There is a possibility that this projection will be subjected to a mild downward revision in the June 2022 policy meeting. Domestic growth is appearing more resilient than global growth and therefore the growth projections are likely to be met in absence of a new shock.

While many global markets had seen their economy growing only due to the policy stimulus, the fact that Indian economy grew without too much support from policy crutches, it is unlikely to suffer the policy withdrawal syndrome that many other western economies are going through.

What are the implications if the inflation risk sustains and oil prices remain elevated for the rest of 2022?

In my view, the RBI could front load the rate hike in the next few months, which will take the repo rate to 5 percent and then 5.15 percent, which is the level before the pandemic. This will lead to gradual reduction in liquidity surplus in the interbank market, increase in on ground interest rates and gradual reduction in inflation.

But a scenario of inflation risk lasting unusually longer could lead to a longer hike cycle. Additionally, it may further worsen the current account deficit and RBI will need to protect the currency from unwarranted volatility. The sustained inflation risk, hiking of rates will weigh on equity markets as well as bond markets.

Energy has turned out to be the best sector in current calendar year, rising more than 12 percent. What are your thoughts and is it the time to stay away from sector?

The sector is sitting on extraordinary profits and valuations but things are fast changing. We continue to remain on wait-and-watch mode on this sector. For now, once can consider to take tactical positions in the sector but avoid any long term calls.

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