“We remain particularly concerned about AMC (asset management company) stocks as SEBI initiates a detailed study of the fees and expenses charged by mutual funds and abrupt removal of long-term tax benefits for debt mutual funds,” Abhishek Agarwal, founder and Managing Partner at Rockstud Capital, told Moneycontrol in an interview.
On the positive side, he feels PSUs as a general theme look attractive. There have been continuous orders from governments either for defence, oil & gas, power, or infrastructure and there has been a continuous thrust on spending to support for the Made-in-India theme, he says.
A seasoned investor, with over 15 years’ experience in Indian financial markets, Agarwal feels auto and auto ancillaries are another sector that will see buying interest from investors, with key drivers supporting an increase in mobility, improvement in economic activity, and healthy freight improvement.
Edited excerpts from the interview:
Some global experts feel the US banking crisis is not over yet. Do you agree and what is your take?
Financial crises have occurred once every decade on average over the last half-century, so the one happening now is, if anything, overdue. We witnessed a delay because banks were operating in a world of ultra-low interest rates and repeated infusions of electronic currency from central banks in 2008.
However, we believe that there isn't the same systemic concern as there was in 2008, when banks all over the world discovered they were exposed to bad investments in the US housing market. Since then, banks have been compelled to keep more capital, and risk restrictions have been strengthened, which may gradually ease the present-day issues.
However, we remain aware that the financial industry is exceedingly complex. It might be difficult to uncover new vulnerabilities until the system is put under stress.
Do you see signs of a recession in the US?
Banks, on average, collapse soon before a recession begins. Prior to the start of the crisis in December 2007, no US bank collapsed in 2005 or 2006. The first three bank collapses occurred in February, September, and October of 2007, right before the start of the recession. Fast forward to 2021 or 2022, and no US bank fails. Silicon Valley Bank and Signature Bank are the first bank collapses in this cycle.
If history is any indicator, the beginning of bank failures indicates an economic slump that is closer than many people believe.
Anxiety over the soundness of banks is often contagious. If consumers become concerned about their deposits, they can transfer them with the click of a mouse.
Even if we do not witness the entire collapse in trust that exemplified the financial crisis, we may see regulators tightening regulations and banks withdrawing their willingness to lend. This might stifle economic engine growth at a time when it is desperately needed.
Which are your favourite sectors now, for FY24?
PSUs as a general theme look attractive. There have been continuous orders from governments either for defence, oil & gas, power, or infrastructure and there's a continuous thrust on spending to support the Made-in-India theme. This itself creates an opportunity for growth.
Historically, valuations between PSU and private companies remain divergent, but this can narrow as there are well-managed companies with cleaner books. If we see since January 2022, PSU stocks have outperformed other themes, i.e., Defensive, Cyclical, and Rate Sensitive. PSU banks specifically have seen a sharp recovery amid superior asset quality, double-digit credit growth, contained credit costs, etc.
PSUs’ market cap today stands at around 13 percent of the total market cap, which has recovered from the Covid-19 lows of 8 percent, whereas it has a historical average of 23 percent, showcasing enough headroom for growth in this space.
Auto and auto ancillaries is another sector we feel will see buying interest from investors with key drivers supporting an increase in mobility, improvement in economic activity, and healthy freight improvement. We have also seen demand for used cars amid long waiting periods for new cars, growth of organised players, and improving financial penetration.
Organised players in the used cars market provide accessibility and reliability of aftermarket services. However, one should remain cognisant about the adoption of EVs (electric vehicles) as demand for auto components for EVs will be lower than traditional ICE (internal combustion engine) vehicles as they have significantly fewer parts, hence the maintenance requirement will reduce.
Is this the right time to add consumption stocks which have seen a massive time correction?
The previous quarter (Q3FY23) was not seen as strong as earlier quarters due to inflationary pressures. But major raw material prices such as palm oil, crude oil, and many others have experienced significant corrections, which function as green shoots for the future.
We remain cautious in several consumer areas since growth remains elusive and equities continue to fetch substantially above-average multiples, though not the premium multiples that they once did.
Do you expect big downgrades in earnings from IT companies for FY24?
We know that the global slowdown will have an impact on IT growth, especially on order book accretion through new contracts or delays in current contracts with major IT businesses. Companies must, however, invest in areas such as cloud migration, digitisation, data analytics, and so on in order to remain competitive.
As a result, despite their clients’ small IT expenditures, the IT sector will continue to get orders. The positive takeaway from the current scenario is the sharp depreciation of the Rupee vs the Dollar acting as a cushioning effect for them.
On one end, the Nifty IT index has seen –27 percent correction from its 2022 peak, whereas they still offer visibility of mid-teens growth CAGR over the next few years. As a result, we feel that this sector serves as a suitable anchor for investors looking to diversify away from currency risk and earnings volatility.
Any sectors where you have a cautious view for FY24?
The fundamental concern for the Indian economy right now is a decreasing demand environment, particularly with prolonged weakness in rural demand. We remain particularly concerned about AMC stocks as SEBI initiates a detailed study of the fees and expenses charged by mutual funds and abrupt removal of long-term tax benefits for debt mutual funds.
Do you see more headwinds than tailwinds for the equity markets in FY24?
In the short run, equities are usually volatile, making it impossible to anticipate which year will provide gains. Because of the sticky inflationary environment, Fed tightening, and volatility that can be encountered, especially in the first half of the calendar year, this year is a little more cautious.
However, if the total risk premium for India declines owing to time correction and a normal monsoon, we should expect these headwinds to diminish as the base catches up.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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