Daily Voice: This fund manager sees value emerging in IT but is bearish on FMCG

Anirudh Garg is the Partner and Fund Manager at Invasset PMS

Anirudh Garg, Partner and Fund Manager, Invasset PMS, is cautious on the FMCG sector due to high valuations and the significant growth it has seen over the past decade.

He, however, sees value emerging in the largecap IT sector, which has taken a hit in recent times. He said “largecap IT companies possess robust business models that make them attractive, particularly when they enter a value-buying zone, as they are currently”, said Garg, who has 15 years of market experience and uses AI algorithmic models, said. Edited excerpts:

Do you see a possibility of war in West Asia? How will it impact the market?

At Invasset PMS, we acknowledge that predicting geopolitical events, particularly wars, falls outside our expertise. However, drawing from over three decades of experience, we have observed that markets tend to hit a low point when faced with severe negative news. Based on this historical pattern, we believe that the market may soon reach a bottom, presenting a favourable opportunity for entry.

It's important to note, though, that despite the current geopolitical uncertainties, our cautious stance on the markets is primarily due to high valuations rather than the potential for conflict. Investors should exercise caution and base their decisions on market valuations.

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Is it the right time to focus on and accumulate in FMCG space?

We advise caution regarding the FMCG sector, which has seen significant growth over the last decade and currently stands at premium valuations. While defensive sectors like FMCG can serve as safe havens during corrections in a bull market, we do not anticipate that FMCG will lead the next bull run due to these valuation concerns.

Additionally, while there has been a decline in premiumisation trends post-COVID, the expectation of a better monsoon could alleviate some input costs for the sector over the next two years, which is our primary focus period. Despite this potential relief, our outlook on the FMCG space remains moderately bearish.

With experts talking of a potential 50 basis points cut in the Fed funds rate, what are your thoughts on inflation and its impact?

Inflation certainly poses a significant concern in the current economic landscape. We are observing fresh bull runs in the metals sector, which could exacerbate inflationary pressures. Additionally, if the Iran-Israel conflict escalates, we could see a sharp spike in oil prices, further influencing inflation.

We prioritise keeping abreast of the Federal Reserve's statements on inflation. Our experience has taught us that the Federal Reserve’s assessments are crucial and typically accurate, and their commentary should be studied meticulously. Predicting against the Federal Reserve's assessments has often proven unproductive.

Can the Reserve Bank of India (RBI) maintain and hold inflation below 4 percent for a sustainable period?

Among global central banks, the RBI has distinguished itself with its adept handling of inflation, particularly during the COVID period, when many of the inflationary challenges began. Unlike some Western central banks, the RBI refrained from implementing excessive stimulus measures, which helped shield India from the severe inflationary pressures experienced globally post-COVID.

The RBI has also adeptly balanced growth, inflation, and currency stability through timely interventions. Holding inflation below 4 percent will largely depend on global commodity prices, as the situation now presents a level playing field internationally.

We believe the RBI is unlikely to reduce interest rates before the Federal Reserve does, considering the potential pressure on the Indian rupee (INR). With India's growth trajectory appearing strong and barring any major political upheavals, we are confident that the RBI can maintain inflation around the 4 percent target.

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Is the risk-reward looking favourable for the consumer staple sector?

Regarding the consumer staples sector, our approach mirrors our stance on the FMCG sector. We observe that valuations across the majority of the consumer staples sectors are cause for concern. The outcome of the monsoon season will be a significant determinant in shaping our future course of action.

At present, we remain neutral — neither overly optimistic (bullish) nor pessimistic (bearish)— on consumer staples, as we continue to monitor these and other influencing factors closely.

Is there value emerging in the largecap IT sector?

"Yes, we are seeing value emerging in the largecap IT sector. While we do not expect this sector to spearhead the next bull run, the largecap IT companies possess robust business models that make them attractive, particularly when they enter a value-buying zone, as they are currently.

We believe that strategic investments in largecap IT can lead to significant alpha generation. However, it is crucial for investors to set clear targets, as these stocks are not anticipated to be the leaders in the forthcoming market rally.

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