Daily Voice: Valuations reasonable for private banks, strong consumer demand shows signs of rural growth recovery, says Anil Rego of Right Horizons

Anil Rego is the Founder and Fund Manager of Right Horizons

Right Horizons’ primary investment focuses are on the building materials segment, consumer discretionary, wealth management, and financial services, Anil Rego, the founder and fund manager. said in an interview to Moneycontrol.

He believes valuations are reasonable for private banks and consumer demand remains strong with signs of recovery in rural growth.

According to him, valuations are reasonable for large caps and certain smallcaps, while midcaps mostly appear to be overvalued. Factors likely to lead to a correction in the equity market are mostly exogenous in nature and domestic macro is favourable, said Rego, a seasoned investor who for over three decades has been making contrarian bets.

Edited excerpts from an interview:

Do you rule out the possibility of major correction in Indian equity markets given the consistent domestic inflows?

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While consistent domestic inflows can provide a supportive backdrop for equity markets, India’s valuations are fairly valued across dimensions after pricing in a relatively stable economy, healthier corporate and household balance sheets and conducive environment. Valuations are reasonable for large caps and certain smallcaps, while midcaps mostly appear to be overvalued. We believe factors likely to lead to a correction are mostly exogenous in nature and domestic macro is favourable.

Do you think the interest rate will remain on the higher side for a longer period, although the US Fed signals first interest rate cut possibly in September policy meeting?

The Federal Reserve last increased interest rates in July 2023 and has kept the Fed Funds Rate at 5.25-5.50 per cent since then, aiming to reduce inflation to its 2 per cent target. Although inflation is still above 2 per cent, there are noticeable signs of substantial relief. For the fourth month in a row, the US consumer price index (CPI) slowed down to 2.9 per cent in July, which is the slowest increase of the inflation rate since March 2021. At the Federal Reserve's annual economic conference, Chair Jerome Powell indicated that the central bank is prepared to shift its policy approach. We believe rates will be cut gradually in order to balance between growth & inflation.

Do you think the US economy will remain stronger than expected and there won't be any possibility of deep slowdown in the economy?

In early August, concerns about a slowdown in economic growth temporarily disrupted the bull market in the US. The downturn occurred despite the US economy gaining momentum in the second quarter. Although inflation is somewhat higher than anticipated, the overall trend shows inflation is moderating. The economy has now navigated through its cyclical peak and is expected to maintain a trajectory of gradual moderation in both growth and inflation, barring any unforeseen significant disruptions.

Which are the sectors that can't be missed from the portfolio?

Our primary investment focuses are on the building materials segment, consumer discretionary, wealth management, and financial services. The overall earnings growth continued to be driven by banking, financial services and insurance (BFSI) and auto with healthcare, realty and capital goods contributing. We believe valuations are reasonable for private banks and consumer demand remains strong with signs of recovery in rural growth.

Will the valuations remain elevated in the midcap and smallcap space?

Valuations in the midcap and smallcap space were primarily driven by macroeconomic stability and growth prospects where strong structural tailwinds for robust earnings growth potential was an opportunity for the SMID (Small-Midcap) segment. While broader market valuations are frothy businesses with fading tailwinds that go through a cool-down in earnings growth will likely witness some bit of correction and quality names within the SMID segments that are able to sustain the future earnings growth is expected to do relatively better.

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