Better to look at sectors focused on the domestic story, says Rahul Shah of Equitymaster

India is one of the most promising stories of the next decade and there’s no way FPIs may want to sit out for long here, says Rahul Shah, Co-Head of Research, Equitymaster. In an interview with MintGenie, he tells us what should one do with the rate-sensitive stocks in the rate hike regime.

Edited excerpts:

What is your view on inflation? Is inflation a bigger risk or is the rate hike since it can trigger a recession?

I would say at least in the US, a recession is a bigger risk and a stronger possibility than inflation because this is how it has worked in the past.

You see, official inflation in the US is close to 9% currently and as per research, inflation beyond 5% has never been brought under control without engineering a recession. Therefore, to bet against a recession would be betting against history.

Rupee's health has been precarious of late. What is your view on it? Where do you see the rupee by the end of this year?

Historically, the rupee has depreciated on a consistent basis against the US dollar simply because there has always been a higher demand for the US dollar vis-à-vis the Indian rupee. 

This trend gets aggravated at times if the demand for dollars takes a nasty turn and the supply isn’t able to keep pace. And this is exactly what’s happening right now. 

The rupee has fallen sharply over the past few weeks in light of high crude oil prices, FII outflows and the strengthening of the dollar in the global markets. 

The way things are moving, I won’t be surprised if the rupee touches the ₹80 per dollar mark sometime in the near future.

If the market sees a rally after the headwinds ease, what sectors may lead the rally? For the medium to long term, what are your favourite sectors for investment?

I guess with the US most likely to head into a recession and other developed economies not in the best of shape either, it will be better to look at sectors focused on the domestic story. 

And amongst these, auto and auto ancillaries, banks, capital goods and defence are some of the sectors that may present good investment opportunities.

How should one approach rate-sensitive stocks in a rising interest rate environment?

I don’t think rates are going to go so high that they will result in huge destruction of demand. We have had periods of much higher interest rates in the past and the Indian corporates were still able to grow their earnings at 12%-15% per annum. 

Therefore, as long as the stocks are fundamentally sound and have attractive valuations, one should go ahead and buy and not worry too much about the interest rate hikes.

FPIs have been selling off Indian equities since October last year. When do you see this trend changing?

I believe India is one of the most promising stories of the next decade and there’s no way FPIs may want to sit out for long here. 

They are perhaps waiting for valuations to turn more attractive before they flock right back into the Indian markets. 

Now that the Indian markets are no longer expensive, we could see FPIs coming back once the global markets stabilise a bit. 

What could also speed up their re-entry is another 10%-15% correction in Indian equities. But make no mistake, they will return.

Disclaimer: The views and recommendations made above are those of the analyst and not of MintGenie.