Daily Voice | No major improvement likely in upgrade-downgrade ratio this earnings season, says Kotak Life's Hemant Kanawala

We believe that the current economic recovery is showing a mixed trend with export-oriented sectors facing challenges due to weakness in the external environment. In contrast, domestic-oriented sectors are relatively better placed.

Within domestic-oriented companies, investment is doing well while consumption is growing slowly. Hence we do not expect a major improvement in the upgrade-downgrade ratio in current quarterly earnings.

Q: Do you think the inflation data indicated that the cost of capital is turning in favour of markets?

Inflation has cooled off in the last few months on the back of softness in commodity prices. We may have seen the best of the inflation print for the year and due to the base effect, there may be a gradual increase in the same from here onwards.

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Also, the RBI governor has repeatedly emphasized that the fight to control inflation is not over yet. Hence, we may not see large rate cuts in the immediate future and the cost of capital is likely to remain stable around current levels.

Q: Is the IT earnings downgrade cycle coming to an end?

The fortune of the IT sector is predominantly linked to US and Europe economies. Sector-wise BFSI and retail are large contributors to revenue. Outlook on the US economy and in particular BFSI sector is uncertain while the retail sector is showing initial signs of a slowdown.

The European economy is also having its own set of challenges and is growing slowly. Hence, we believe that the IT earnings downgrade cycle may not have come to an end.

Q: Are you a big fan of the auto sector?

The auto sector is a diverse sector comprising passenger vehicles, commercial vehicles, and auto ancillaries. Currently, the sector is having a tailwind of lower raw material prices, which is helping the margins.

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Also, on the back of new launches and weak volume growth for the last few years, volume for the sector is expected to be strong for the next few quarters. However, the investor needs to keep in mind disruption from electric vehicles and alternate fuels in the medium term, which may impact valuations.

Q: Do you expect the equity market momentum to continue in the coming months or will there be a 5-7 percent correction from here on?

Markets have rallied strongly from the bottom in March and are currently trading at a premium to long-term averages. Although both the micro and macro of India are looking strong and there is a lot of interest in India from foreign investors, premium valuation leaves room for correction on the back of adverse development in the external environment.

Q: Do you really think the Federal Reserve will announce two more rate hikes even after falling inflation? Also, do you see any possibility of a US growth slowdown in the second half of FY24?

Long term target of the US Fed is to have inflation below 2 percent. The future course of rate hikes will depend on the trajectory of inflation and unemployment data.

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If inflation remains above 2 percent and the unemployment rate remains below 4 percent, then US Fed may consider hiking rates to bring inflation within its target range.

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