Daily Voice | PGIM India cautious on export-oriented sectors, says its portfolio manager

Here are edited excerpts from the interview:

Are you cautious on export-driven sectors given the recessionary concerns globally?

Given the concerns of recession both in US and in Europe, we are cautious on the export-oriented sectors / companies. Global economic growth slowed to a crawl in July, according to the latest PMI survey data, led by the developed world's growth contracting for the first time in two years.

Emerging market growth as a whole remained broadly resilient at one of the fastest rates seen over the past decade thanks to recovering services sector, though some pace was lost compared to June. Manufacturing output contracted in all of the four largest developed economies in July, with the US also seeing a contracting services sector and services growth weakening in all other cases.

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Considering slowing global growth we have been incrementally adding domestic-oriented sectors in our PMS Portfolios. Recently we have added Banks and Autos (domestic-driven sectors) to our portfolios.

As the domestic demand is expected to remain healthy, what are the sectors to be benefitted the most and sectors to bet on?

Given the recessionary fears in the US, we prefer domestic oriented sectors versus the export-oriented ones. Domestic data is quite encouraging whether it is credit growth, personal loan growth, GST collections, Auto sales, or IIP data. In that context sectors where we are positive given the strong domestic demand are industrials (capex-oriented sectors), banks, autos and residential real estate (exposure through building materials segment).

Do you think the market is unlikely to see its record highs in CY22 given the current global environment?

Overall the earnings season in India was in line with expectation, while revenue growth was ahead of expectation indicating a healthy demand environment. The current relief rally of ~14 percent from the recent bottom is of a similar magnitude as seen in past episodes of post-recession market performance.

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Accordingly, the market may remain sideways in the near term as valuations are now above long term averages. However, from a 3 to 5 year perspective, we remain constructive on Indian Equities given the fact that the Indian economy would be one of the fastest growing economies in the world.

Given the weakening global economic growth, do you expect more pain in IT space in coming months too?

Largecap IT valuations have corrected sharply. After the recent correction, risk-reward has become favourable with majority of the global concerns getting priced-in. Most IT services companies are currently trading at FY24 PEG of 1.3-1.5x.

What in our view is not priced-in is if North America goes into a recession or goes through a pro-longed phase of stagflation which can lead to cut in IT spends and earnings downgrades. We remain selective and are neutral on the sector v/s broader market.

Also read - GST collections spike 28% over last year to Rs 1.44 lakh crore in August

Euro hits 20-year low against the US dollar and some analysts expect further depreciation in the currency. Do you expect major recession in Europe?

The European Union's single currency has hit its lowest level against the US dollar since 2002 as data pointed to a growing recession risk in the eurozone. The war in Ukraine and the subsequent pain to Europe's energy markets have affected the Euro's decline. China's slower growth post-pandemic has also led to a uncertainty regarding global growth.

European energy prices may spike further if additional Russian exports of energy (both crude oil and gas) were to be removed from global energy markets either voluntarily by Russia or forcefully by Europe/US through further sanctions.

Global gas prices may stay high after the recent spike or head higher in the forthcoming winter months, which may drag prices of other energy forms including crude oil higher.

Russia's gas exports to Europe have declined significantly, which may prevent Europe building sufficient reserves to meet with higher demand for gas in the winter, which may push up gas prices further.

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