Abhay Agarwal, Founder, and Fund Manager at Piper Serica, who has nearly three decades of experience in the equity stock market, believes that it will be quite challenging for RBI in the forthcoming policy meeting to ensure that there is adequate liquidity in the system. "So that interest rates stay in a comfortable zone while also ensuring that the market is not overly worried about a hard landing."
The Reserve Bank of India will announce its decision on key policy rates on February 9, Wednesday. This will be first policy meeting after Union Budget.
With crude prices above $90 a barrel, "there will be further pressure on RBI to remove excess liquidity and cool off speculative excesses without harming the long-term growth of the economy," says Agarwal.
Is it the right time to invest in infrastructure, construction, capital goods, banks, and realty stocks, especially after Union Budget where the CAPEX was increased by 35 percent to Rs 7.5 lakh crore for FY23.
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The budget has clearly laid out the intent of the government to support the growth of infrastructure in the country for the next 25 years. Therefore we expect that all companies that provide infrastructure development and financing are going to benefit from this focus. At the same time, investors will need to take into account that infrastructure development requires heavy capital investment upfront and these projects have a long gestation period.
In addition, there are various factors that can lead to delays in these projects that can further negatively impact the return for equity investors. We would advise investors to be cautious before jumping into infrastructure stocks. They should wait for attractive entry points at valuations that take into account all the risks that are associated with these long-term projects.
We are towards the end of the December quarter earnings season. How do you read quarterly earnings announced so far?
The earnings have been a mixed bag. Some sectors like large IT software companies have performed better-than-expected and at the same time, some sectors have lagged behind. But one thing that we are seeing across the board is severe pressure on margins as even leading companies are not able to pass on all the cost price increases to their customers.
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We are seeing some transmission of these cost increases in the current quarter but even now companies are worried about losing market share if they increase prices to compensate for cost increases. The good news is that balance sheets have improved across the board as companies have deleveraged and brought down interest costs. Overall we expect that earnings will improve over the next four quarters as customers absorb the price increases and volume growth stays strong.
Broadly, what are your expectations from the RBI policy meeting scheduled next week?
It is looking more and more likely that RBI will increase the reverse repo rates by 25 to 50 basis points and may also increase the repo rate by 25 basis points. While the RBI had indicated an accommodative stance in the last policy meeting and did not change the rates, the 10-year G-sec yields have hardened significantly since then. Since the Union Budget, the 10-year G-sec yields have spiked to almost 7 percent. It will be quite challenging for RBI to ensure that there is adequate liquidity in the system so that interest rates stay in a comfortable zone while also ensuring that the market is not overly worried about a hard landing.
Inflationary pressures will continue in the system as companies will start passing on input price increases to customers. With crude prices above $90 a barrel, there will be further pressure on RBI to remove excess liquidity and cool off speculative excesses without harming the long-term growth of the economy. It will be a challenging policy meeting for RBI.
Also read - Finance Minister Exclusive: Nirmala Sitharaman On Government's Growth Vision Under Budget 2022
Do you think the Union Budget will help in consumption revival given the high unemployment and rural distress in the country?
The budget is largely an expression of government intent towards creating a long-term virtuous growth cycle for the economy. Other than stating the broad direction of utilization of governments receipts it does not really dwell into micro measures. Therefore we need to see how the significant increase in infrastructure spending actually percolates down to the ground level. Only with this percolation will there be a revival of jobs and rural incomes. At the same time, governments spending will not be adequate to create a virtuous cycle of growth.
The private sector CapEx has been anaemic in the recent past and unless that picks up the level of unemployment and rural distress will not improve in a marked manner. We are hopeful that government will announce further micro schemes and incentives for job-creating sectors like real estate and textile that will create a large number of jobs, especially in semi-urban and rural areas.
FIIs have already sold more than Rs 1.4 lakh crore worth of Indian equities since September 2021. In your view, what decisions of Fed are hampering FII flow in emerging markets including India?
The recent comments by Fed have caught global investors by surprise. The Fed has been most hawkish ever in the last couple of years. This has created a lot of uncertainty with global investors who are suddenly unsure about the pace of rate hikes by the Fed. Till last year the expectation was that the Fed will raise rates three times this year. Now it is expected that Fed will raise rates five times this year. As a result, we are seeing that global investors who are very sensitive to rate hikes are taking money back from emerging markets and preferring to sit in cash for the time being. We believe that faced by multi-decade high inflation of almost 7% the Fed has no option other than to take a hawkish stance. It wants to make sure there is no hard landing and speculative excesses based on cheap capital gradually work their way out of the market. We expect that for next quarter this process of removal of cheap liquidity will continue and therefore the emerging markets flows will stay anaemic.
What are the themes that one should consider for the portfolio with 1-2 years' time horizon?
The government has identified technology as the major change agent to drive growth. Therefore, companies that supply tech solutions and companies that use technology to provide services to customers directly are expected to do well. These include Internet companies, B2B SaaS, and consumer tech companies. we expect large banks also to be major beneficiaries because all large infrastructure projects will require complex project financing which can only be provided by large banks with the expertise to do so. As the per capita income grows there will be demand for a better quality of living. This will provide growth to industries like healthcare, education, residential real estate, and travel and entertainment. Another interesting space to look at is biofuels since the government is encouraging the blending of biofuels with petrol. Lastly, companies that are doing import substitution through participation in PLI schemes are also expected to do well.
What are the three announcements that you liked and disliked the most from Union Budget 2022?
We like the fact that the government has laid out clear intent of pursuing economic growth for the next 25 years. It did not cater to any populist schemes nor was there any negative surprise of any kind. The overall emphasis seems to be on encouraging the formation of private capital that can drive private CapEx. We like the intent that the government wants to get out of business and only provide policy support for the development of businesses by the private sector specially startups.
At the same time, we would like to get more clarity on the sudden increase in borrowing target by the government to fund its expenses. The bond yields shot up soon after this announcement so the onus is on the government to provide better clarity on how much extra borrowing will it go for in the next financial year. The divestment plan also needs to pick up the pace. Even with the LIC IPO, there will be a big gap between budget and actual disinvestment. Lastly, the government needs to provide some big sops for the big employment generating sectors like real estate and textiles.
Oil prices were back above $90 a barrel now, and if it hits $100 a barrel in the near term, will it dampen the market sentiment, but should one be worried due to that correction?
The sharp increase in oil prices is a big concern especially with the global economy opening up. It can potentially derail economic growth by increasing inflation and thereby the cost of borrowings. The onus he is on the government to promote alternative sources of energy through all kinds of subsidies and tax sops so that our reliance on imported crude reduces significantly. Since that is a long-term project in the short term if crude spikes beyond $100 it will definitely be a negative event for markets though not cause a major correction by itself.
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