"India continues to be expensive valuation-wise and a big disappointment on any front (corporate earnings, perceived political stability, geo-political surprise) could trigger a drawdown," Shantanu Bhargava, Head of Products, Investment Advisory, and Discretionary Services at Waterfield Advisors says in an interview to Moneycontrol.
That is why he said he would refrain from calling out a 11 percent jump in markets with a very high degree of confidence from current levels by the end of the year.
On the IT space, he expects stability in spending to emerge post-elections in the USA in 2024. "I expect divergence in performance between large and mid-tier IT firms with mid-tier IT firms commanding a premium," says Shantanu who is also the Managing Director of Listed Investments at Waterfield.
Do you see interest rate cut by RBI by end of 2023, or in first quarter of 2024?
The resilience of economic growth from the beginning of this year has been a common theme virtually everywhere. In Q1, global growth turned out to be significantly higher than anticipated. India's growth is resilient due to its improved balance sheets & economy firing on multiple cylinders. For FY24, the RBI has estimated a 6.5 percent GDP growth as per MPC minutes. It's unlikely that growth would dramatically undershoot this figure unless there is a severe economic shock globally. Therefore, the case for a rate cut in December is weak based on the current growth trajectory.
Second, for the RBI to lower rates, CPI must continue to cool off. The RBI's CPI forecast for FY24 has been lowered to 5.1 percent in the most recent MPC but remains higher than the targeted 4 percent level. Over the next several months, liquidity is anticipated to remain plentiful in the system.
The normalcy of the monsoons will be crucial in the trajectory towards 4 percent CPI. The southwest monsoon may face stronger-than-expected El Niño conditions that could result in weak rainfall & reduced crop output and it poses an upside risk to the inflation forecast. This further weakens the case for a rate cut by RBI in December 2023.
Are you cautious on export-oriented sectors including IT?
The IT sector has struggled after moderation in one-time spending led by covid-related savings. Its core markets and industries are under stress with IT spending at the top 10 US banks falling below pre-pandemic levels in Q1CY23. Plus, pricing could further come under pressure with high-end digital work being kept in-house by enterprises.
We expect stability in spending to emerge post-elections in the USA in 2024. Instead of painting the entire sector with the same brush, it would pay to be selective and capitalize on good entry points offered by some high-quality stocks in the sector.
I expect divergence in performance between large and mid-tier IT firms with mid-tier IT firms commanding a premium and there even may be performance differences within large IT firms that are related to the moderation of tech spending between their separate key clients.
Are you super bullish on the Indian equity markets and expect the year 2023 to end with at least 15 percent return?
I will use Nifty50 as a proxy to answer this question. Nifty50 had delivered a return of 4.32 percent in CY 2022, much below its long-term average and had ended the final trading day in December 2022 at a level of 18,105. For 15 percent returns in the calendar year, Nifty50 will have to cross a level of ~ 20,820 by the end of December this year, i.e., an increase of almost ~ 11 percent from current levels of ~ 18,755.
India has the best structural story globally with strong macros. In the recent past, FII flows have also turned positive and are carrying the markets to new highs. There’s a strong case for markets to end on a positive note this year. However, India continues to be expensive valuation-wise and a big disappointment on any front (corporate earnings, perceived political stability, geo-political surprise) could trigger a drawdown and that is why I will refrain from calling out a 11 percent jump in markets with a very high degree of confidence from current levels by the end of the year. Over the next 10 years, India will be a great wealth-creation story.
Your take on EV transition & import substitution theme?
The government has been attempting to re-invigorate the domestic manufacturing sector for a long time now. It remains an under-whelming contributor to India’s GDP growth, relatively. Import substitution as a theme is aimed at improving our BOP structurally, transforming domestic manufacturing, creating more jobs, and attracting greater investments.
For the theme to work, the government will have to marry good intentions with a good approach. There have been examples of good intentions and ordinary execution in the past. For example, while PLI has been touted as a panacea for our manufacturing sector, its long-term success will depend on fixing the structural problems within the policy design itself, thoughtful incentivisation and improvement of our overall economic system.
Your preferred bets for current financial year?
In public equities, most sectors are trading at a premium/in line with their long-term average valuations. This makes the job of contrarian investing very difficult currently. The sharp decline in dispersion in valuations among different sectors in the last year is compelling us to consider flexi-cap strategies for incremental allocation into equities.
Also, given the reduction in valuation dispersion among sectors, it may be prudent to allocate to well-diversified equity strategies instead of highly concentrated strategies like focused equity funds. Allocation to passively managed funds should also be considered.
Under alternatives, we like the valuations at which some of the REITs and InvITs are available, and we have gradually increased allocations to these sectors in our client portfolios.
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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