Narnolia Securities co-founder and chief investment officer (CIO) Shailendra Kumar thinks there is a higher probability of a pause by the US Federal Reserve after it raised interest rates by a quarter of a percentage point on May 3 as regional banks continue to see trouble.
"Banking stress is already leading to tightening (of) conditions and that will too further act similar to the impact of rate hikes. Hence there appears higher probability of a pause now," says Kumar, who has over two decades of experience in fund management.
At home, he expects MNCs in the capital goods space to show healthy growth over the next three or four years as capex improves and various steps are taken to make the most of China plus one strategy. Edited excerpts of an interview:
What is your view of the Federal Reserve's latest rate decision and do you expect it to hold interest rates for the rest of the year?
The US monetary policy has stayed in the tightening cycle for more than a year now but inflation still stays higher around 5 percent, as reported in March, and the underlying economy stays in expansion mode with April service sector PMI at 53.6, triggering another 25 bps hike by the Fed on May 3.
Recent issues in the banking sector in the US are worrying for market participants. Also, the banking stress is already leading to tightening of conditions and that will too further act similar to the impact of rate hikes. So, there appears higher probability of a pause now.
Will the correction continue in the information technology (IT) space? Should one start building a portfolio in the sector?
The IT sector is no more a homogeneous space in the stock market. We have already seen niche small IT companies exhibiting strong double-digit growth during the ongoing results season. Growth deceleration has happened mostly to large IT companies with higher exposure to large global corporations.
Companies having higher exposure to public infrastructure, engineering design, electronics and mid-sized companies are doing very well. So in IT, being stock-specific is a better strategy.
In aggregate, surely the sector is down due to the higher weightage of large IT companies but there, too, with recent valuation multiple de-rating, stocks have become value buys.
In the near term, they may remain sideways as in base building mode for the next two quarters but one must start taking stock-specific investment decisions in the sector.
Also read: FOMC meeting | How correlated are Indian and US markets after rate action?
Do MNCs in the capital goods segment look attractive?
Capital goods companies including MNCs were witnessing mid-single-digit revenue growth during for last 10 years, while fixed costs like manpower costs were growing at higher rates, denting their margins and suppressing their profit growth even further.
But we are seeing strong improvements in their fortune; order books have rapidly grown and with operating leverage kicking in their profits are growing at strong 20 percent+ rates. With an improving capex atmosphere, including industrial capex and also industry 4.0 initiatives, MNCs in the capital goods segment will be exhibiting strong profit growth for the next three-four years.
Some of these MNCs have announced higher investment in their Indian businesses and commentaries in general are highly positive. A few of the MNCs are also making Indian subsidiary part of their global supply chain due to China plus one strategy.
The sharp run-up in stock prices of some of these MNCs in the last one year restricts immediate upside, buying them on declines looks to be a better strategy.
Which are the sectors that can generate huge alpha?
Looking at the steady and strong earnings growth ahead for the next three-four years, companies in the sector like banking, NBFCs, auto components, electronics, organized retail, hospitals and capital goods look set to deliver strong returns going forward.
But one must select the right stocks from these high-growth sectors. It is advisable to stick to high quality management that is prudent in capital allocation, has the right strategy, and most importantly, execution capability is superior.
Do you see value in building materials space, given that interest rates have stabilised?
Companies in the building material space are showing strong growth. The real estate sector for sure has started a new upcycle. Apart from stabilised interest rates, unsold inventories being at multiple-year lows the segment is showing both higher launches as well as pricing power.
Building material segment is best the space to play this cycle. Businesses operating in areas like pipes, wires & cables, and sanitary ware are showing consistent growth potential and must be looked at.
But, as is the norm, it being a high growth sector finding the right valuation point to enter will be important to generate better returns.
Do you think the worst is behind for new-age businesses?
In terms of business performance, the majority of new-age businesses have done exceedingly well post their listings. But their stock prices have seen persistent valuation de-rating all through 2022. This was a global phenomenon, it happened across global markets.
In the private market, these companies were being valued for some operational vanity matrix and the same was used during their listing process, which was not sustainable in the public market.
Now valuations are more reasonable and most of these companies have strong growth capital available in their balance sheets. But sustained change in fortune in terms of stock price performance will require some more clarity on their capital allocation policy, ability to generate free cash and competitive moat.
Has the earnings season played out along expected lines has it been better than expected? What is the most surprising and disappointing factor?
Earnings season till now is slightly ahead of our expectations. Margins of Indian corporates had continuously gone down during the four quarters of the calendar year 2022 but have come back to normal levels now. The impact of a sharp price rise in commodities and logistics is behind.
Most surprising is the strong commentary for revenue as well as bottom- line growth for FY24 from most of the management this quarter.
Infosys was the lone disappointment this quarter till now, both in terms of reported numbers as well as management commentary for FY24.
After a long time, industrial companies are talking of strong demand. While there appears to be some net interest margin compression going ahead but with strong loan growth and controlled costs, financial companies are looking stronger.
Will the market find it tough to report double-digit returns in the calendar year 2023?
2023 is a year of base building for the next bull market. The near-term movement will be impacted more by how the interest rate trajectory goes in the Western market, how currencies behave, and when strong FIIs flow starts coming back to India.
More importantly, we need to remember that while markets are staying sideways, Indian corporate earnings are growing stronger, which means that if 2023 ends with a lower return then the market will be set for a strong next calendar as rising earnings continuously keep making valuation lower.
At the same time, the strong macro condition prevailing in India will ensure that if some global upheaval starts again our market will defend itself very strongly. So, in terms of risk-reward, the Indian stock market is favourably positioned for long-term investors.
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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