"The way the markets are right now, a 5 to 10 percent upside seems more probable," Santosh Joseph, Founder and Managing Partner at Refolio Investments says in an interview with Moneycontrol.
According to him, people's risk-taking ability has improved slightly, primarily due to alleviated concerns about inflation, which previously deterred them from investing in volatile assets such as equities.
Joseph, a financial services professional with over 20 years of experience in asset management, banking and insurance, says that in the IT space at a very macro level, earnings have largely bottomed out and the downgrades are more or less priced in. “IT space is well poised and the dollar index is also very favourable for the IT index right now,” he adds.
Q: Considering the falling inflation, do you really expect two more rate hikes by the US Federal Reserve in the rest of the calendar year?
It’s difficult to predict whether the US federal reserve will go for two more rate hikes. As we have got two more data which suggest that on an annual basis inflation has really cooled off. This is also aligning with the broader narrative that it takes almost 9-12 months for a rate hike to show an impact. As we have seen over the last 18-24 months since the time the US started the rate hike cycle, we initially did not see an effect of it on inflation. Now, we begin to see on an annualized basis cooling off of inflation, it is yet to be ascertained if the initial rate hikes are working now.
Any further rate hike or rate pause will purely be in line with how this inflation cooling-off number consolidates. If it is going to be in line with the recent numbers, then, we may see a pause becoming a stop or current levels being at near-term peaks.
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The signs seem to be encouraging that the rate hikes that are done are reining in inflation. But to say that we will have two more rate hikes in the year or no more rate hikes in the year seems to be a little difficult in the present scenario. We have to wait for more data to come in to validate the impact of previous rate hikes.
Q: What would be the most likely scenario in the rest of the calendar year from here on - 5-10 percent upside or correction? What is the rationale?
The way the markets are right now, a 5 to 10 percent upside seems more probable. People’s ability to take risks is slightly better right now and it’s largely to do with inflation fears that many people were worried about, and this kept them away from risky assets like equities. With peak rates, recession fears have cooled off quite a bit since the early part of this year.
The very fact that there is a larger consensus building across the world that recession may not be as bad as one estimated it to be, is what will keep the markets more buoyant rather than worrisome.
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Q: What is your take on the IT space after recent quarterly earnings (TCS, Wipro, HCL Tech announced so far) and management commentaries?
We really are somewhere near the bottom plateauing out of the IT industry. The recent earnings by the bellwethers have been encouraging. The management commentaries are also positive. Though they are not overtly bullish on the overall sector immediately, I think there is great value on the table.
As the economy and businesses are loosening up a little bit over the easing of inflation, you will see some bit of spending on the tech side from larger markets like the US. Therefore, the IT space is well poised and the dollar index is also very favourable for the IT index right now.
Q: Do you expect the IT earnings downgrade cycle to end in the current quarter?
Whether it's going to end this quarter or maybe it's going to take one or two quarters, it's very specific to individual companies, the kind of businesses and the clients they are catering to and the geographies and the economies they are catering to.
It's safe to say that at a very macro level, IT earnings have largely bottomed out and the downgrades are more or less priced in.
Q: Do you see any possibility of growth slowdown a bit in the second half of FY24 in India?
The question of the possibility of a growth slowdown in the second half of FY24 is very unlikely. In the worst-case scenario, we may see a moderation. Of course, the best case scenario is that we continue growing and we grow even better than FY22 and maybe even FY23.
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Q: Is the capital goods space looking overvalued now?
When IT was down and even banking and financial services had taken a beating, capital goods were leading the pack. They were being beaten quite a bit, and they seem to have caught the fancy of the market. Right now it is looking overvalued compared to what it was at the bottom of the cycle.
The valuations have to still mature even more than this, therefore one cannot say that it is overvalued. The scope for the industry seems to be even more promising in the days ahead.
Q: Which are the most favourite sectors at the FII desk considering their consistent buying in India in the current financial year?
One of the favourite bets among all the FII desks in the current scheme of things is banking and financial services. That is the largest sector where you can capture a lot of growth and consumption of the Indian economy.
Though you have many other sectors that they are like, from consumption to the entire Bharat story and at some level even your emerging favourites like defence and capital goods. A clear bet is that many FIIs are showing a bias towards banking and financial services. And I think that's a place where you will see a lot more action and a lot more flow in the next few quarters or years.
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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