InCred Wealth CEO Nitin Rao thinks that the worst could be over for the US markets and says a recession or not, it is unlikely that the market will sink to the previous lows.
Rao, who has more than 30 years of experience in the banking and NBFC space, is upbeat on India story as well but see two big risks to growth — the impact of a sub-par monsoon and a contraction in merchandise exports. Edited excerpts of an interview:
Do you expect the Indian equities to continue to attract FII inflows for the rest of the calendar year, and will it be better than the previous year?
Earlier this year, in February 2023, if one looked at the FPI flow into Indian equities, there were a few compelling observations that made us believe this could well be a year of revival in FPI interest in the India, equities. Twelve months rolling FPI flows as a percent of India’s market capitalisation around February 2023 were low and at levels last seen in 2012, 2014 and the 2008-09 GFC (global financial crisis).
Historically, FPI flows have revived from those levels and, so far, 2023 doesn’t seem to be much different, given that March through May 2023 we have seen a cumulative FPI net inflow of $7.72 billion. While one can argue that most of the March-April flows were due to GQG buying into the Adani group of stocks, May was a broader based buying across sectors and stocks.
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Also, in February, we saw 12-month trailing FPI flows at all-time lows (closer to $35 billion negative) – these levels were never seen even during the 2008 GFC. With FPI ownership being relatively light and with the valuation premium of India over EM (emerging markets) and developed markets reducing, it could further support FPIs' interest in India.
Another important perspective is that India is one of the fastest-growing economies in the world. With macroeconomic backdrop reasonably sound (lowering inflationary pressures, peaking of policy rates, contained current account deficit, stable currency and policy stability to name a few) it only aids in attracting further FPI interest.
In general, there has been a reassuring change in FPI interest in EM equities since November–December 2022. While China led the FPI inflows last year, followed by Brazil, Thailand, Indonesia, 2023 has seen large buying interest in Taiwan, Korea and, more recently, India.
Post the FPI ownership peak seen in Jan 2021, ownership of EM pack by FPIs dropped by almost 4 percent odd. In the past three-four months of CY23, FPI ownership has improved by almost 1 percent, indicating the resurgence in FPI buying interest of EMs. India thus is also an indirect beneficiary of the EM pack.
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From the market perspective, EPS growth for FY23–25E period for the Nifty50 is expected to track 15 percent-16 percent CAGR. This is post a 17- 18 percent CAGR growth in EPS over the past two fiscal years (FY22 and FY23). The index has broadly since October 2021 remained flattish (0.75 percent CAGR price returns only). The index now trades at a P/E of ~19x 12m forward versus ~24x in Oct-21. This makes the equity story relatively attractive when juxtaposed against a slowing developed world and mixed growth in other EMs.
Is the Monetary Policy Committee still worried about the CPI inflation outlook?
The RBI seems to have delivered an objective assessment of the prevailing domestic as well as global macroeconomic set-up in the June policy. The RBI governor and the MPC members have been abundantly clear in their statements that the headline CPI merely coming within the 4 percent +/- 2 percent band wouldn’t be enough and they would be keen to see the headline CPI to come closer to or at the 4 percent target inflation on a durable basis.
Uncertainty around this year’s monsoon (and its probable impact on food inflation) coupled with expectations of the Fed hiking in its June meeting, it would be unrealistic to expect a rate cut or change in policy stance anytime soon from the RBI. In our view, RBI would want to keep its options open to act basis the evolving global /domestic situation.
Do you see any major risk to the growth projection for FY24?
The two main risks for growth projections for FY24 could come from the impact of sub-par monsoons and a contraction in merchandise exports. IMD has continued to indicate that India will receive normal monsoons over the entire period (June-September 2023), while June could be slightly below normal.
What one needs to watch is the distribution of monsoon (spatial and temporal) – a normal distribution would be critical for timely kharif crop sowing. The much talked about El Nino risk also could have some impact on the rains, while historically an El Nino year hasn’t necessarily impacted growth inflation dynamics materially.
India’s exports (merchandise and non-oil) have contracted over the past few months quite sharply. A slowing world would mean fragile global demand for Indian goods and could have some impact on growth. This would, however, be an evolving situation and a few quarters out one might get a better sense of the quantum of impact on India’s FY24 growth.
Government capex (if frontloaded) could act as a counterbalance to the impact of both these risks that I have highlighted.
Do you see a major slowdown in the US even after the rate hikes of the past?
While we do not have any primary research on the developments in the US economy, what we read and agree with most economists surveyed by Bloomberg and the Federal Reserve staff is that the US is facing an economic recession more likely than not by the end of CY2023. With the regional banking turmoil the US is going through, further tightening of banking credit, diminished consumer savings, rising layoffs and diminishing and declining corporate profits all indicate a sharp slowdown in the US.
The critical question (more than the US recession) is its impact on markets. We think the worst for the markets is over. Recession or no recession, it looks unlikely that the markets will revisit the previous lows (over 15 percent lower from the current levels). The answer to this view could be in the details of the corporate earnings in the US – while demand isn’t booming, and margins have dropped from all-time highs but sales are still resilient, energy costs are much lower and USD has weakened from last year (a positive for exporters).
Many sectors, too, in the US such as tech and startup have already been through a tough phase in 2022 – retrenchments, refocusing of business strategies, etc. Semiconductors, homebuilders, too, went through a tough 2022 with global supply chain disruptions and rising rates. Now with both stabilised, these sectors could do well.
Do you see a revival in the IT sector?
It is still tough out there. We continue to be selective but now prefer structural stories across both Tier-I and II companies versus Tier-Is earlier, given that the performance divergence across our coverage universe is broadening. Our preference for Tier-I companies earlier was predicated on their ability to navigate client-specific challenges better in a deteriorating macroeconomic environment. And that a pause in the earnings upgrade cycle could drive P/E derating for Tier-IIs and has largely played out with the CY22 average returns of mid-sized IT companies (LTIMindtree, Coforge, Mphasis, Persistent Systems, L&T Technology Services, & Cyient) in our coverage universe underperforming Tier-I peers by around 4 percent.
Further, though the shift in the CY23F IT spending landscape from growth to cost take-out and rising competitive intensity favour the scale of operations of Tier-I companies, Q3FY23 earnings suggest that select Tier-II companies can defend their wallet share better.
Finally, though we would have liked better entry points in our Tier-II coverage universe, given the average entry P/E multiple (18.6x FY25F consensus EPS) is still higher than that of Tier-I’s at 16.8x FY25F, we highlight that broadening performance divergence in the backdrop of waning sectoral tailwinds of CY20/21 suggest that select Tier-II names may continue to attract a scarcity premium.
Do you think the manufacturing companies, which were hit by higher input and energy costs, are looking good for investment?
The capital goods sector outperformed the broad market with a revival in the capex cycle led by an increase in order inflow and higher execution. We feel the outperformance will continue and the sector deserves a higher valuation, given the commencement of order placement activity in large multilateral projects, uptick in the investment cycle, and margin expansion.
The recent correction in prices of steel, base metals and other commodities will be a positive. India is back on the new capex upcycle after 15 years of the last infrastructure supercycle, which halted in 2008. The government has launched the PLI scheme, which is expected to attract a capex of around Rs 3 trillion over the next five years.
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