In an interview with Moneycontrol, Devang Mehta, Director of Equity Advisory at Spark Private Wealth, stated that the Indian market's response to the US credit rating downgrade should not be a long-term concern. Mehta believes that India's inflation trajectory and monetary policy management have been better than those of its peers.
He feels important factors such as earnings, crude prices and fund flows will be the key to the market in the medium term.
On the great theme to bet on, Devang with more than 23 years of experience in the areas of wealth management, investment advisory, equity research, equity sales & portfolio management says one theme which has sort of made a huge comeback after a long hibernation is capital expenditure.
He believes the sectors that benefit from this theme include infrastructure, capital goods, cement, building materials, automation, and power ancillaries.
What is your take on the US rating downgrade and how will it affect the Indian markets?
Globally & even locally the speed of this rally has been too swift & hence the market can find an excuse to correct on the back of this news. However, the impact on the Indian market should be short-lived as India has had a relatively better inflation trajectory and monetary policy management than its peers.
Other important factors such as earnings, crude prices and fund flows will be the key to the market in the medium term.
Do you see any risk to the equity markets that have been into consolidation mode after the recent fresh record high?
After such a fast & furious rally in the last couple of months, a minor correction & consolidation is in fact good for the health of the markets. Though we should be enthused & happy about hitting new highs, it’s just a number and records are made to be broken.
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It is important to note that, equity returns are lumpy and non-linear. Nothing happens for two years & in weeks, light years happen in terms of returns.
One needs to analyse, the factors which led markets to a new high: do these still hold good today, if the answer is yes, we are in for better times. India's growth shines amidst the global economic challenges and hence someone looking for the longer term should ideally take advantage of correction rather than getting worried.
As Peter Lynch says, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections than has been lost in corrections themselves....”
Do you think the markets have started pricing in the expected rate cut cycle which is likely to resume in first quarter of next calendar year?
The Federal Reserve’s latest hike came as no surprise to investors who had already factored in the possibility of such a move. Ultimately, the Federal Reserve is attempting to orchestrate a soft landing following a period of high inflation and rate hikes.
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The US economy has been resilient despite high inflation and tightening monetary policy. The unemployment rate is near record lows in half of US states, and consumer confidence is at a two-year high. Despite the “higher for longer” rhetoric, a sustainable drop in inflation along with a slowdown in US growth should likely lead the Fed to cut rates in the first half of 2024.
One sector that can create enormous wealth in the coming years?
Ideally, a well-diversified portfolio should be the order of the day. Recently, the theme which has sort of made a huge comeback after a long hibernation is capital expenditure (capex). In a pre-election year, government fiscal expenditure on infra & other allied activity stays in momentum. Order flows to industrial companies/capital goods sector have also increased, with year-on-year growth of over 15 percent from the pre-pandemic lows of 5 percent.
There's reason for optimism as capacity utilization is currently at 75%, surpassing the historical average. For instance, railway capex has increased from Rs 80,000 crore to Rs 2,50,000 crore in just three years. This significant rise in allocations will benefit both public and private companies. Additionally, new private projects are being announced due to increasing government capital expenditure, which has reached an all-time high.
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Top sectors which benefit as a part of this theme are infrastructure, capital goods, cement, building materials, automation, and power ancillaries. Corporate lenders also form a proxy to play this theme as they will be beneficiaries of credit growth to fund the expansion of these companies.
Do you see the relentless rallies continuing in midcap and smallcap indexes?
Indian HNI & retail investors have shown extraordinary maturity by staying invested in equities despite higher volatility, interim market corrections, long periods of drift and competition from FDs even during a rising rate environment. The rewards are now bound to come.
In an expansionary phase of the economy, generally, the mid & small cap companies tend to do well. Also with capacity utilizations rising, balance sheets de levered and robust capex, credit growth & consumption, this space looks attractive.
Also, short-term drawdowns in this space in times of heightened volatility have to be something which one has to have an appetite for. The fundamental matrix & merit to buy or hold that business in the portfolio should be the deciding factor. The portfolio should be constructed and nurtured with companies having robust revenues and earnings visibility along with strong corporate governance.
What is your preference among IT space - large cap or mid cap; or is it better to stay away from the sector?
Weak discretionary spending has been witnessed across many verticals, especially in financial services. Overall, we expect low single-digit growth for most companies. Most of the businesses in the large-cap space have had a decent price & valuation correction.
However, it would be prudent here to be market cap agnostic and look at themes within the IT space, where rather than orders for essential spending focus is on developmental & growth spending, which will start once the slowdown or recession fears die down. Also, within the sector, one has to pick & choose businesses with niche advantages and core competencies which are second to none.
We have seen a big FII inflow since the start of the financial year. Do you expect that trend to continue for the rest of the year?
India stands out amongst other EMs (emerging markets) due to its lower external vulnerabilities, strong corporate balance sheets and an estimated 2 to 3-year conservative earnings CAGR of at least 13 to 14 percent for the Nifty index. Various parameters including current account and fiscal situation, forex reserves, strong GST collections and inflation levels continue to encourage investors.
The prevailing socio-economic and political stability, extremely strong digital footprint, visible changes in terms of infrastructure and urbanisation coupled with a restrained inclination towards populist measures along with the government’s thrust on continual reforms and comprehensive policies like the introduction of the PLI scheme, will continue to attract FII flows in India.
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