Daily Voice | Not much scope for appreciation in IT stocks: Ladderup Wealth Management MD

From an economic perspective, the immediate worries are rising inflation and a falling Rupee. On the inflation front, while prices of petroleum and metals have cooled off somewhat, there is still lack of clarity on the inflation trajectory for the next few quarters. We have all seen how the USD has appreciated against most global currencies in the past few months.

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With rising interest rates and problems in Europe, the flow to USD shall remain strong. A weakened Rupee not only puts pressure on our current account deficit, it also reduces our forex reserves, that had swollen over the last few years.

What do you make of the Fed’s decision, especially after considering the correction in commodity prices?

As expected, the Fed raised rates by another 75 bps in July. Current indications suggest that rate increases are going to continue for the rest of the year, and probably in 2023 too. The Federal Open Market Committee (FOMC) had completely misjudged the inflationary aftershock of their quantitative easing to combat the impact of Covid.

It is going to take a lot of effort to curb inflation. While the easing of commodity prices may help the process, the supply side has to catch up with the demand, and that could take a long time.

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Do you think IT stocks have already seen enough correction and now is the time to buy, or do you expect some more correction? The IT index is the biggest loser this calendar year, down 24 percent.

The rally in IT stocks primarily happened because of the sudden volume of new business due to Covid-led `work-from-home’. That bump in revenue is behind us. In fact, as the developed world struggles with slowdown or may be even recession, IT spends may not increase in the foreseeable future.

I feel that most IT stocks are already at the upper end of their valuations, with hardly any scope for appreciation in the next few quarters. On the contrary, there is a good chance that valuations will get corrected in case the market environment weakens.

We have seen around 9-10 percent recovery from June lows. What are the sectors to bet on at this point in time?

Yes, the market has bounced back in the past few weeks. There are many sectors that have upside potential in short to medium term. Banking and financial services has not done well in the past year or so, owing to fears of a slowing economy.

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Similarly, there has not been much movement in the capital goods segment. The infrastructure sector has also not seen much movement in the past few quarters. In an economy like ours, there is a high chance of enhanced economic activity over the next two to three years. All these sectors should be direct beneficiaries of that growth.

Is it the time to start allocating money to the long-term curve, given that interest rates are hardening and long-term yields are moving up?

Interest rates have increased quite a bit from the lows witnessed last year. With most central banks around the world increasing rates, India will also follow suit. Moreover, inflation is a factor too. I feel the rate tightening will continue for a few more quarters.

But yes, people should start thinking about investing in long-dated securities. Pretty soon the yields will reach a good level where not only current income, but also potential capital appreciation could be on offer.

Do you think the US will be a challenge for you while taking investment decisions over the next couple of quarters? Also, what is your projection for the US economy — recession or slowdown?

Tackling inflation has become the biggest challenge for US policy makers. Many economists are warning that the present aggressive style of interest rate hikes may be damaging and may push the economy towards recession. Whether that happens or not, slowdown is a reality.

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What will be interesting to watch is how the inflation changes over the next four to five quarters. Economic cycles have shortened quite a bit, so even if there is a short recessionary period, it is not going to make a big dent in the economy. To that extent, I feel the fears may be exaggerated.

Looking at the renewed buying interest from FIIs during the last week after several months, do you think FIIs will continue pouring money into India as we are the faster growing economy, and several sectors are at reasonable valuations?

We should see how FII’s are adjusting their global allocations. With rising interest rates, strengthening USD, and volatile markets, every institution would increase its fixed income allocations.

India is one of the most important and most attractive destinations for foreign investment. It is just a matter of time before foreign flows become healthy again.

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