Daily Voice: Infosys, HCLTech, LTIMindtree likely to lead recovery in IT space, says this fund manager

Is the time to have exposure to energy and gold amid Middle East tensions?

When considering any investment, it’s essential to focus on the long-term CAGR of the asset. In the case of gold, it’s viewed as a 10 percent asset in India, primarily due to dollar appreciation. We prefer financial assets over gold. Exposure to gold is typically more relevant in expensive market conditions, as it serves as a way to park funds rather than drive capital growth. Recently, the price of 24-carat gold in India has surged to around Rs 76,000 per 10 grams, driven by safe-haven demand amid rising Middle East tensions. However, as interest rates and the US dollar remain strong, gold’s upside potential could be limited in the long term.

Regarding energy stocks, the outlook in India is mixed. While oil prices have risen due to concerns about supply disruptions from the Middle East, Indian energy stocks like ONGC are constrained by government pricing controls, making them less attractive for growth. For global energy stocks, there could be potential in serving as a hedge against broader market volatility, but in the Indian context, the pressures faced by oil-producing companies limit the upside. In conclusion, gold may provide short-term protection but should not be seen as a primary growth driver, while energy stocks, particularly in India, warrant a cautious approach given the current dynamics.

Which sectors look attractive enough to buy in the current market correction?

The markets are currently quite expensive, so the focus should shift towards capital preservation rather than aggressive capital appreciation. We’ve benefited significantly from the strong Indian market over the past two years, but with valuations becoming stretched, it’s time to concentrate on sectors that haven’t yet seen a significant performance surge. This includes large-cap sectors with sustainable business models, especially capital-light companies that demonstrate strong returns on capital employed (ROCE) and return on equity (ROE).

Rather than chasing growth, the focus should be on businesses with solid competitive moats, as preserving the gains made is just as critical as generating new alpha. The metaphorical “batting” phase of the market may be nearing its end, and it’s time to focus on “bowling and fielding”—ensuring that the portfolio’s alpha is well-preserved during this phase of the cycle.

Do you expect any surprises from the Monetary Policy Committee (MPC) next week?

Given the current global monetary trends, particularly with the recent rate cut by the US Federal Reserve, it’s likely that India will follow suit soon. However, the Reserve Bank of India (RBI) may wait until December before making any rate adjustments. Inflation in India has been moderating, and there is some expectation that it could dip below 4 percent, creating room for rate cuts. Therefore, while no immediate changes are expected in the upcoming meeting, a rate cut could be on the horizon by the end of the year. This is contingent on inflation trends remaining stable and aligned with RBI’s broader targets.

Do you see serious money really flowing from India to China, especially after the stimulus measures announced by China?

As Rakesh Jhunjhunwala famously said, “Bhav Bhagwaan Che” (Price is God). While China’s economic achievements are remarkable, stock markets are an entirely different ballgame. For instance, since October 2008, India’s Nifty has surged 11x, whereas China’s markets are still recovering from those lows. The concern about Indian money flowing into China is overstated. China’s markets will attract their own capital, and India’s demographic and digital growth will continue to offer strong opportunities over the next decade.

Additionally, trust issues surrounding China, particularly following the regulatory crackdown on Jack Ma’s Alibaba and Ant Group, have raised concerns. Jack Ma’s public confrontation with regulators led to his empire coming under heavy scrutiny, which has contributed to investor skepticism about the Chinese market. As a result, the fear of large capital flows moving from India to China is largely unfounded. India’s structural advantages and favourable demographics make it a long-term investment haven.

Do you want to take exposure to the IT sector post management commentaries in Q2FY25 earnings?

The shallow downturn in the IT sector seems to be behind us, and the sector is poised for recovery. Q2FY25 earnings are expected to show positive growth, driven by increased demand for AI services and improvements in decision-making cycles. Major players like Infosys, HCLTech, and LTIMindtree are likely to lead this recovery, and despite some softness in deal wins, margins remain steady. Given these factors, we are cautiously optimistic and do maintain exposure to the IT sector as we expect an upgrade in performance going forward. We anticipate the IT sector to benefit from structural trends like AI, automation, and digital transformation, further enhancing its potential for recovery.

Is the market really worried due to the rejig in F&O norms?

The recent changes to SEBI’s Futures and Options (F&O) norms, which will be implemented in phases starting November 2024, have introduced stricter guidelines, such as increasing the minimum contract size and limiting weekly expiry contracts. These measures aim to curb speculative retail trading and mitigate the risks associated with high-leverage instruments.

While some market analysts believe this could reduce market volumes and impact retail participation, I am not particularly worried about these changes. The tighter regulations are primarily aimed at protecting retail investors and ensuring greater market stability. Over the long term, this could lead to more disciplined trading behaviour and healthier market dynamics. From a strategic viewpoint, the impact of these norms will likely be minimal for those with well-structured investment portfolios, and the market will adapt to these changes over time.

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