"After last year's Russia-Ukraine conflict and surging inflation, in FY2024 we are presented with a new set of risk factors which cannot be ignored. Interest rate hikes which have taken place in the last 1 year will show its effect with a lag effect," Aniruddha Sarkar, Chief Investment Officer at Quest Investment Advisors says in an interview with Moneycontrol.
Along with that, he says, "we do not see inflation being tamed in developed markets and that would continue to hurt household savings. Thus would not be surprised to see markets remaining weak to volatile in the near term."
The US Fed has failed miserably and is on the contrary hurting the jobs and bank balance sheets, which could lead to major financial disasters if not controlled at the right time, says Sarkar, who has over 15 years of experience in the capital markets and manages money for investors across PMS, AIF and advisory businesses.
He feels that inflation will find its own natural level and the Fed should be focused on economic growth and a strong banking financial system.
Do you think capital goods and domestic consumer goods are looking attractive now?
We follow a bottom-up approach to stock selection and our investment is based on our views on the ability of investee companies to manage growth momentum, earnings trajectory and relative valuations. Given this context, we believe there are opportunities in both industrials/capital goods and domestic consumer companies. Within industrials, we believe companies focused on the domestic capex cycle and India manufacturing opportunity are at an interesting juncture currently. Management outlook on investment growth remains broad-based and positive for most companies. Gross margins are benefiting from price hikes taken over the past year as commodity prices fell and demand remains strong. Operating leverage-led gains led to record aggregate EBITDA margins. As far as consumer companies are concerned, we are very selective and look for companies with a sustainable long-term growth opportunity with large addressable TAM (Total Addressable Market) and demonstrated ability of the right to win by investee companies.
In the near term we are witnessing that consumption growth remains K-shaped and rural growth continues to remain weak and there are signs that lower-end urban consumption has also slowed down.
We are more bullish on higher-end urban consumption like hotels, branded apparel, travel accessories, etc. However, as we move ahead, we believe there are pockets in consumer space which would benefit from demand normalisation led by a recovery in rural India, tailwinds of commodity inflation receding and the waning effect of transitory issues some companies in this sector faced in the last few quarters.
Do you still think banking stocks would outperform every other sector in the coming quarters?
The recent bank runs on various US-based banks have surely sent shivers down all banks globally and India is no different. However, in my view, the Indian banking system continues to enjoy robust fundamentals with falling non-performing loans (NPL) ratios and provisioning costs, which is likely to continue going forward. However, in coming quarters we will witness bank deposit rates moving up further as large banks would become competitive to gain liabilities market share to manage softness in CASA accretion.
However, most banks will continue to benefit from upward repricing in External Benchmark based Lending Rate (EBLR) and Marginal Cost of funding based Lending Rate (MCLR) linked loans till deposit pricing catches up led by utilisation of liquidity and excess Statutory Liquidity Ratio (SLR) for growth in advances and therefore offset deposit cost pressures in the medium term.
We continue to remain positive on banks given the largely benign credit environment, strong and consistent credit growth driven by traction in the retail and SME segments and expected recovery in the corporate segment and accordingly remain invested in select banks in both private as well as public sectors based on our views on the ability of investee banks to manage growth momentum, earnings trajectory and relative valuations.
What is your take on Adani Group stocks especially after fundraising? Are you taking a position or advising to buy a few of them?
For the last few years since the large wealth creation seen in Adani group stocks, we have stayed away from them as the majority of the companies did not meet our investment filters. The recent fiasco around the group companies is something we would not be in a position to comment on. However, I think the management is doing the right things to build investor comfort and also ensure the continuity of the businesses on their growth path by cutting leverage where ever it had gone overboard. We nevertheless continue to avoid these in our client portfolios as they still do not meet our investment filters.
What are the risk factors for the market in FY24? Do you think the equity market correction is over now or do you still see a possibility of some more points of downfall in the coming months?
Global markets have never been more dynamic than they have been in the last few years. There is no dearth of events and macro factors that keep investors on the edge. After last year's Russia-Ukraine conflict and surging inflation, I think in FY2024 we are presented with a new set of risk factors which cannot be ignored. Interest rate hikes which have taken place in the last 1 year will show their effect with a lag effect. Some glimpse of that we got in the recent crisis in some banks in the US which had to be shut down due to asset-liability mismatch and stress on balance sheets. I would not say this is a one-off case and could be the tip of the iceberg.
Along with that, we do not see inflation being tamed in developed markets and that would continue to hurt household savings. Thus would not be surprised to see markets remaining weak to volatile in the near term.
Which is the one sector that you are super bullish on, now?
With the government capex continuing to stay supportive of a strong private capex cycle, we remain positive on domestic capex and manufacturing theme. Within this theme, we believe subsectors like Defence, Power & Power T&D, and Railway capex would continue to do well led by underlying demand as can be seen by the large order books of most of the companies in these sectors. The CMIE data has finally started looking up with projects completed also up 25 percent YoY in 1HFY23. Power T&D awards are expected to rise sharply in FY23E-24E as the bid pipeline rises 2.3x in FY22-23 tender is out. PLI and data centres can add more than $10 billion annually to capex, as per some industry research reports.
The recent Union Budget gave a boost to the long-awaited directional positive on capex, particularly infrastructure, and we are further enthusiastic with the continued commitment shown by the government towards capex revival in India and its multiplier effect on the economy.
Do you expect more weakness in corporate earnings in the coming quarters?
Yes, without mincing words I would say surely there could be some downgrades happening in earnings outlook in coming quarters. However, this would not be broad-based but more sector-specific with sectors exposed to exports and rural consumption getting hit the most. Meanwhile, banks, industrials and autos could continue to hold the flag for the earnings season in the coming quarters as they did in the recent one.
Do you think the core inflation would remain sticky for the coming months?
Inflation in the last one year has defied all efforts by central banks globally and held its head high. I do not see that changing drastically and believe high inflation is the new norm. As supply chains are yet to go back to normalcy, energy prices remain elevated and food supplies remain disrupted, no amount of central bank rate hikes would be able to tame this animal called inflation in the near term. Eventually, high inflation will kill demand and that will lead to cooling off inflation in its natural course.
Will the RBI continue with its current policy stance for the rest of the calendar year, though many experts are expecting to change in stance to neutral in the next couple of meetings?
It’s high time the RBI starts thinking of decoupling its policy decisions with that of the Fed unless we have plans to take our banks on the same path as that has been with US banks in recent times. Jokes apart, I believe the RBI is also cognitive of the fact that growth in India is of paramount importance at this point and that should not be stifled with a high interest rate environment. Demand for housing could also fall off the cliff if rates continue to rise further. Thus my view is that the RBI would soon take a neutral stance on rate hikes and pause in the forthcoming MPC meeting.
Will the Fed continue with aggressive rate hikes given that inflation remains elevated?
The US Fed needs to accept the failure of its rate hike stance on both controlling inflation and cutting demand. It has failed miserably and on the contrary is hurting jobs and bank balance sheets, which could lead to major financial disasters if not controlled at the right time.
The Fed needs to understand that they need to think out of the box and not follow textbook economics for taming inflation. As I said, inflation will find its own natural level and Fed should be focused on economic growth and a strong banking financial system. 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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