In an interview with ETMarkets, Ahmad said: “In the absence of clear leadership in equities, a barbell play should be deployed with Cyclical sectors including Banking, Auto & infra on one side and IT on the other side, as they continue to deliver stable profitability profile and resilient outlook,” Edited excerpts:
While the Indian market has remained resilient amid global volatility and the Adani story. Where do you see markets headed? Any near-term headwinds that investors should watch out for?
First 45 days of 2023 have seen a stark change in the macro backdrop as the key headwinds of 2022 namely inflation and the resultant rate surge have rolled over.
2023’s narrative is around slowing growth and peak inflation. This has been cheered by financial assets, with S&P500 moving up 9% YTD and MSCI EM moving up 10%.
The Nifty50 in the same time frame is almost flat despite the large corporate-level negative developments.
The relative underperformance of India since the start of 2023 is a good thing because this helped to remove a major part of frothiness and premium from Indian valuations.
Hence, one of the key pushback from the foreign investors on the Indian market was valuations and they despite being serious and confident about 2020’s being India’s decade were sitting on the fence.
The current consolidation in the Indian market will be construed positively by FIIs.
Global headwinds in terms of sticky inflation pushing the US Fed to push the terminal rate towards 5.25-5.5 and a domestic headwind of continued status quo on the rise in private capex and rural demand remain the key monitorable.
Some of the banks have already started raising rates – do you see the realty, auto, and capital goods sectors taking a hit?
Multiyear high credit growth has pressurised banks to raise rates on time deposits. The impact of this development is not limited to the shirking net interest margin (NIM) profile for the banks but also have a negative drag on interest rate-sensitive sector including realty, auto, and capital goods.
Thankfully, the rate and magnitude of rate hikes in India is far lower than most key markets globally and the resilient domestic macro and economy has weathered the rate hike cycle almost unscathed as the glide path for the economy still remains intact.
The second-degree effect to the most rate-sensitive sectors has been seen in “real estate”; wherein there is some slowdown from sugar high growth numbers of CY-22 is seen in the residential real estate market in India (that had astounding progress in 2022, setting new sales records of 68% YoY).
The increased repo rate could impact residential sales to some extent, particularly in the affordable segment but in the mid-term, it will have no impact.
Auto sector, especially the 4W segment continues to show buoyancy. The mid-cycle spoils with the higher- and middle-class affordability and savings levers are still keeping this sector strong.
Cap-ex, which could have been impacted by higher rates has got a strong policy lever in terms of the massive cap-ex plan by Govt of India.
With the government going full throttle on investment in most areas including railways, roads, defence, housing, and water this sector will have a positive rub-off from the medium-term standpoint as well.
In a rising interest rate environment how should investors play the market? Does it make sense to reshuffle asset allocation?
Asset allocation remains cornerstone for investments. The relevance of asset allocation is even more critical in the current tumultuous landscape.
As we are in the late innings of the rate cycle, fixed income allocation especially through “clipping the coupon” kind of play and duration play coming to reckoning in the coming quarters.
Hence, one has look at the current lofty levels on G-Sec & SDL allocated on the belly of the yield curve.
In the absence of clear leadership in Equities, a barbell play should be deployed with Cyclical sectors including Banking, Auto & infra on one side and IT on the other side, as they continue to deliver stable profitability profiles and resilient outlook.
Considering this backdrop, a prudent asset allocation is need of the hour, wherein Fixed Income allocation should be made at current elevated rates on offer and declines in the equity segment should be used to create a position in domestic-focused cyclical plays.
Priority of the Budget is to ensure that Rs 10 lakh crore earmarked for capital expenditure is actually spent within fiscal 2023-24 to keep up the growth momentum – FM said in an event. Which sectors could impact by govt CAPEX?
The government proposes to spend a record 10 lakh crore (3.3% of GDP; all-time high) as capex in FY24E (up 33% YoY) with a tangible multiplier effect, which could potentially drive broad-based economic growth.
Capex allocation was focused on sectors including railways, roads, defence, housing, water (Jal Jeevan), and metro projects. The two sectors that stand out in terms of allocation is Railways (up 51%) and roads (up 25%).
Given 50% of the total allocated capex is earmarked for Railways and Roads is a clear indication of structurally brining down overall logistics costs in the economy which are currently at 14% of GDP and increase competitiveness and scale of Indian exports.
In other categories, segments like Housing (PM Awaas Yojana), Water (Jal Jeevan mission) has seen a growth in outlay to the tune of ~66% YoY, 17% YoY.
The focus on the defence segment is to indigenise the value chain of production thereby reducing import dependence (cushion CAD) while incubating homegrown private companies, which itself can have a multiplier effect on the capex value chain.
The Budget has also focused on accelerating the green energy spectrum in order to reduce the carbon footprint. The major areas being Green Hydrogen and providing assistance of INR 8300 crore to the Ladakh Renewable project enabling investment of INR 20000 crore, which will have a multiplier effect across the capex value chain.
Where is the smart money moving? What is the data telling you?
Smart money is loosely associated with contra plays. 6-9 months back it was PSU Banking but currently, as we speak it is the Government logistics and IT.
The thing about the smart money allocation is that only successful ex-ante calls are classified as smart plays on an ex-post basis.
Hence the term is losing its relevance specially with market efficiency owing to increased liquidity and also rapidly diminishing information asymmetries.
Hence, one is better off focusing on his own top-down bottom-up assessment, convictions, and beliefs rather than being influenced by these concepts.
What is the ideal methodology for bottom-up picking? What is the checklist one should follow?
In this transition of the economic cycle, where corporate earnings are moderating and there is momentum loss in the economic variables both hinting towards an air-pocket or end of mid-cycle plays. In such turbulence, it is important to again focus on looking at below key variables:
1) Strength in operating cash flow profile
2) Resilient return ratios & margins
3) Leverage is not at uncontrolled levels
4) Not relatively over valued plays
5) Zeroing on private and government cap-ex sectoral focus
6) No Corporate Governance flags
7) Sectoral growth rate.
What should investors do when they face a situation when the portfolio stock falls say 40%? How should one evaluate buy or sell strategy?
Volatility is part and parcel of the Investment journey and if rightly spotted the volatility or material decline is an opportunity to invest. What helps in separating the signal from the noise is the framework.
A pre-defined and comprehensive framework to assess the causes and impact of a news flow/event on a particular stock/sector should be at play always.
First and foremost, analyse the stock that has declined by 40% by revisiting the investment thesis of the company/sector and economy level.
If the decline is triggered by a material change in key components of the investment thesis like a change in growth visibility of 2-3 years, unforeseen changes in regulations or competition or a Corporate governance red flag, etc then one has to reconsider the allocation call to quantify the change into the perceived intrinsic value of the stock.
However, if the stock has declined by 40% on a systematic risk even like the Covid crash of March 2020, then that is an opportunity to invest or average at lower levels.
The framework would also suggest the same as it will show that the event not martially denting/questioning a business model but it is only an aberration that has impacted the entire market.
What is your call on IT stocks for 2023? The voice is growing louder, and the sector could turn out to be an outperformer.
IT sector is the largest sector that is most exposed to global externalities. With the sticky inflation, strong labor market and retail segment pushing the Fed terminal rate pricing move higher again by 5.25-5.5%.
This has increased the odds of recession hitting developed markets including the US. This global uncertainty about a material slowdown and/or recession is likely to keep this space volatile.
However, looking at the resilience in the earnings, large-cap IT stocks are preferred. The choice is quite calculated because i) valuations are very close to long-term averages vis a vis midcap which are still expensive ii) they are more on the Enterprise side of the business (run the business) v/s other players especially ER&D space which is discretionary nature which gets more impacted during uncertain environment iii) large cap will be key beneficiary from vendor consolidation.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
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