Daily Voice | This fund manager says market trading close to fair value, is bullish on these 2 themes

Sanjay Bembalkar, Co-Head (Equity), Union Asset Management Company, bullish on financials and consumption-driven themes.

Sanjay Bembalkar, Co-Head (Equity), Union Asset Management Company is, bullish on the Indian story and expects average per capita income growth to be robust, which, in turn, will give a boost to consumption-driven themes.

The market is trading close to its fair value if we factor in the GDP growth rate assumptions, Bembalkar, who has 15 years of experience in fund management, tells Moneycontrol in an interview. He, however, cautions that if the global uncertainty drags on beyond the current financial year, it may have implications for Indian businesses. Edited excerpts:

What are your preferences among financials and IT?

In our assessment of the stock selection, we follow our internal fair-value approach, which considers aspects like the quality of the business, earnings growth, interest rates and riskiness of the business. Given the current context of slowing global growth and a cyclical upswing for India, our framework is pointing to overweight financials and a neutral stance on the IT sector.

A combination of (a) strong balance sheets, which can facilitate growth, (b) an uptick in growth expectations due to manufacturing recovery and (c) reasonable valuations make a strong case for the financial sector in upcoming years. IT sector, on the other side, has undergone correction on the pretext of slowing growth rates. Now reasonable valuations provide comfort in select pockets and remain a stock selection sector.

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Sanjay Bembalkar

Co-Head - Equity|Union Asset Management Company

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We believe the government's efforts to boost the manufacturing sector, coupled with cyclical recovery, should lead to increased demand for financial products. Our analysis indicates that the low penetration of these products in India in comparison to other developing markets presents a significant growth opportunity for our financial sector businesses. Key risks to be monitored are (a) significant margin compression as increases in interest rates are passed on the funding side and (b) rise in credit costs, thanks to increasing EMIs and stress due to higher inflation.

While the IT sector has been a remarkable wealth-creator in the past few decades, recent years have seen the sector's high-growth phase diminish. A negative rub-off from global banking sector issues and slowing retail spending have resulted in analysts cutting growth forecasts. Rightly factoring in the slowdown, a price correction has ensued in stocks. These high-quality businesses currently face headwinds due to uncertainties in their outlook, primarily due to their significant reliance on regions like the US and Europe.

In these regions, GDP growth expectations have taken a substantial hit, and yet central banks have not indicated any pivot away from restrictive monetary policies. Nevertheless, in such uncertain times, we find certain pockets within the IT sector appealing, particularly those where companies have shown defendable moats in their business models. Due to attractive valuations, we are neutral on the IT sector in diversified funds.

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What is your reading of the provisional numbers announced, so far, by corporates?

It's important to understand that quarterly fluctuations in business cycles are a natural aspect of the equity investment asset class. While we don't place too much emphasis on quarterly gyrations and instead concentrate on the long-term potential of businesses, we have observed a slowdown of growth for certain segments within the consumer sector.

Businesses focused on rural demand have seen a sharper impact of inflation on consumer spending ability. Even globally, it appears that macroeconomic uncertainty and inflation have a larger impact on consumer spending, which is making an impact in sectors like IT, the export-led consumer sector and the materials sector.

On the other hand, domestic demand-focused sectors like financials and industrials have provided relatively stronger commentary.

Do you think the indicators suggest that the equity market has not priced in a recession?

Our internal research suggests that time is indeed a friend of equity investors. Those with longer investment horizons are more capable of handling the short-term uncertainties inherent to the equity investment asset class. According to our fair-value approach, the market is currently trading close to its fair value, factoring in the current GDP growth rate assumptions.

If the global macroeconomic uncertain situation continues to drag beyond the current financial year, it may have implications for Indian businesses, which is currently not widely anticipated.

Also read: SEBI cracks down on Brightcom Group for accounting & disclosure irregularities

Is the real estate sector looking attractive now?

Real estate has been a key asset class for Indian investors. Also, it is an asset class which undergoes long six-eight year cycles in demand-supply. Since 2012, we have experienced muted price movements in the broad real estate sector. At the current juncture, many indicators, such as (i) affordability factor, (ii) spread of housing inflation and average salary hikes in the corporate sector and (iii) the percentage of premium apartments sold are indicating the robustness of the demand ahead.

We are witnessing organised players gaining a larger share of the market pie. There is notable growth in both premium residential and commercial real estate, which we find particularly attractive due to favourable risk-reward at this juncture.

One crucial aspect to monitor is the effect of rising interest rates on potential buyers’ appetite. Though interest rates remain lower than historical levels, the recent increase may dent the demand sentiments and delay the recovery.

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Have you spotted a theme that has to be in a portfolio, which could yield good results in a couple of years?

It is recognised that the Indian government is committed to transforming the country into a global manufacturing powerhouse. This is being achieved through targeted measures such as implementing production-linked incentives (PLI) to spur domestic manufacturing activities. As India integrates into the global supply chain and solidifies its position as a manufacturing hub, we foresee that the manufacturing and industrial sectors may emerge as prominent investment themes.

As previously mentioned, in light of the current global growth slowdown and India's impending cyclical upturn, we maintain an overweight stance on financials.

India stands out as one of the world's most rapidly growing large economies, and we expect its average per capita income growth to be robust. Considering this rising per capita income, we are of the opinion that consumption-driven themes may perform well in the medium to long term time frame, particularly within the consumer discretionary sector.

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.