Daily Voice: Smart meters is a hot theme in power sector but with some caution, says this fund manager

The upcoming earnings season will be a key market driver as investors keenly watch the earnings to justify the all-time high run in the markets. The initial nine months of the fiscal year exhibited huge growth, but several factors hint at a more moderate trajectory in Q4. Global economic deceleration, fueled by geopolitical uncertainties and rising interest rates, threatens Indian export demand.

Domestically, high inflation and high interest rates could constrain corporate profit margins and lead to more cautious consumer spending. Also, fluctuations in commodity prices, particularly oil, will significantly impact input costs across various industries. Therefore, a moderate growth trajectory is anticipated for Q4, with sectoral variations in performance. Sectors such as autos, consumer services, and private banks are expected to see bright spots with solid growth. Conversely, the IT, FMCG, metals, and energy sectors might underperform.

Do you think the base of IT stocks will start looking attractive for FY25?

While the near-term outlook for IT stocks might be cautious due to global headwinds, the base of these stocks could offer compelling value for FY25. The recent performance of IT giants like TCS paints a promising picture of the sector's attractiveness in FY25. TCS's strong Q4 earnings growth suggests their ability to navigate headwinds. Positive management commentary and deal flow like TCS would further strengthen the case for IT stocks.

The ongoing digital transformation wave creates long-term demand and a potential overcorrection in IT stock prices could present a value opportunity. However, a severe global slowdown and rising competition remain concerns.

What are the key factors that the US Federal Reserve wants to focus on before cutting policy rates?

The US Federal Reserve closely monitors several factors before considering a rate cut. Taming inflation is their top priority, and they'll likely keep rates high if inflation remains stubborn. Conversely, a healthy labour market with a stable unemployment rate is favourable.

Looking towards the latter half of 2024, some signs hint at a possible rate cut. While the March inflation data surprised upwards and dampened the probability of a rate cut in June, a sustained moderation in inflation might make the Fed ease its tightening grip.

Additionally, a significant economic slowdown or risk of recession could prompt rate cuts to prevent a more severe downturn. There is also a lot of speculation of a potential rate cut before the US elections.

Is the smart meters segment a good theme to play, in the power sector?

Smart meters is a hot theme in the power sector but with some caution. The government's push for efficiency and real-time data bodes well for companies like Siemens India and ABB India, which are positioned to benefit from large-scale deployments.

The potential market is massive, but there are hurdles. Bureaucracy and funding delays could slow things down, but integrating smart meters with existing grids requires careful planning. Cybersecurity is also a significant concern. Smart meters offer exciting growth, but navigating implementation challenges and data security will be key.

Have you seen major green shoots in private capex?

A true private capex boom has yet to arrive, but some encouraging signs exist for India's investment landscape. Recent data from CMIE shows a significant rise in private sector capex spending in a recent quarter. This indicates a shift in focus from just maintaining the existing capacity to making expansionary investments, a positive sign for growth.

While the combined capex by both public and private sectors has grown, it's still early. More consistent growth over several quarters will be needed to confirm a sustained revival. However, challenges like global economic slowdowns, rising borrowing costs, and excess capacity in some industries remain on the watchlist.

Which are the key factors that give you confidence that a major crash won't be seen in the equity markets?

Many factors make us cautiously optimistic about the current market. Firstly, recent corporate earnings hint at continued profitability growth, indicating companies' resilience in the face of current challenges. Secondly, strong labour markets with low unemployment and rising wages translate to increased consumer spending power, potentially bolstering corporate earnings and stock prices.

Thirdly, the limited downward revisions to future earnings estimates by analysts suggest their continued anticipation of corporate growth, which can help maintain investor confidence. Finally, and most importantly, the potential for a central bank to shift towards a more accommodative stance after raising interest rates to combat inflation could ease pressure on stock valuations and improve market sentiment.

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