For an investor with a 3-year time horizon, auto stocks can be wealth creators. Market leaders in passenger vehicles, 2-wheelers and tractors are good long-term buys.
If US-China trade skirmishes escalate into a full-blown trade war, it will lead to recession and India, too, will be hit, VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said in an interview to Moneycontrol’s Kshitij Anand.Edited excerpts:
Q) The inversion of US yield curve triggered risk-off sentiment among the global investor community. How are things looking for Indian markets?
A) Flattening and inversion of yield curves need not always lead to recession. Flattening and inversion of yield curves correctly predicted the recessions of 2008-09, 1999-2000, 1991-92 and 1978-80.
But, flattening and inversion of yield curves in 1985-86, 1994-95, 1997-98 and 2005-06 did not lead to recession.
The global economy is heading for a slowdown for sure. But, whether it would lead to a recession or not would depend on the outcome of the US-China trade skirmishes.
If the trade skirmishes aggravate into a full-blown trade war, it will lead to recession and India, too, will be impacted since a falling tide would depress all boats.
However, central banks globally would turn accommodative and dovish in the event of a recession. This would protect the downside to the market.
Q) How did India Inc fare in the June quarter earnings? How is the September quarter likely to be for D-Street?
A) India Inc did not fare as expected, with around 50 percent of BSE100 missing earnings estimates. Downgrades are far higher than upgrades. The Q2 earnings growth is likely to be subdued, and the risks to earnings downgrade are more elevated now.
Q) FIIs (foreign institutional investors) have been pulling out money from Indian markets consistently since July, while mutual funds absorbed most of that selling. Do you think the momentum will continue? More FII selling till December 2019?
A) July witnessed selling by foreign investors in most emerging markets. In India, the selling became aggressive due to the higher tax on FPIs (foreign portfolio investors) registered as trusts. If the government addresses this issue, selling can stop and FPIs may even turn buyers.
Q) With global recession looming, gold is set to scale Mount 40K on MCX. Do you think it is time to invest in gold or gold exchange-traded funds(ETFs)?
A) Gold is bullish. However, investors should not go overboard on gold. Gold ETFs, which are liquid, are good.
Q) The auto sector is under pressure with more firms opting for shutdowns. Do you think this sector can produce wealth-creators if someone buys the stocks at current levels with a time frame of two-three years?
A) For an investor with a three-year horizon, auto stocks can turn out to be wealth-creators. Market leaders in passenger vehicles, 2-wheelers and tractors are good buys for the long-term.
At present market prices, there is value in many auto stocks. But buying should be, ideally, calibrated.
Q) D-Street is looking to government for stimulus. What are the measures that can lift the investor sentiment?
A) With monetary transmission being poor, there are expectations that the government would come up with an aggressive fiscal stimulus. However, the stark reality is that there is not much room for fiscal stimulus.
The Public Sector Borrowing Requirement at around 8 percent is swallowing up the entire financial savings in the economy. So, more fiscal stimulus would crowd-out private investment.
Aggressive disinvestment and deploying the proceeds in capital expenditure is doable and desirable in the present context.
Ideally, we need reforms like privatisation, which can boost business confidence and animal spirits. The government has the political space to go for these bold reforms but it remains to be seen whether it will bite the bullet.
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