India has zero probability of slipping into a recession, says Jaspreet Singh Arora, CIO, Research & Ranking. In an interview with MintGenie, Arora said we might have made the bottom for the year and August could turn out to be a mildly positive month.
Edited excerpts:
How bigger is the risk of economic slowdown for the Indian market?
After falling by 1.6% in the first quarter of 2022, US GDP fell by 0.9% in the second quarter of this year. US PMI Composite output index fell to the lowest level in more than two years to 47.5% which hints at a probable economic contraction.
India’s quarterly GDP growth has ranged between low single-digit to mid-double-digit YoY in the recent past and is likely to remain so. Also, there are many factors in favour of it that are most likely to counter the risk of economic slowdown.
Most importantly, as per a popular survey, India has zero probability of slipping into a recession amidst major economies that have higher chances of being gripped by recession.
At present, India remains an attractive destination and is among the top five countries in terms of GDP.
India is one of the few emerging economies with healthy fundamentals from both near and long-term outlooks and is pegged to be the fastest-growing large economy in FY23, with average GDP growth expectations of 7.4% (IMF’s global CY22 GDP estimate is 3.6 per cent, China 4.4 per cent).
The domestic market logged healthy gains in July despite prevailing concerns. Do you think the market can sustain this gain in August also?
In line with global equity indices, the Indian equity market witnessed a sharp recovery in July with the Nifty up by 9% month-on-month (MoM) after three months of downturn. With July-22 performance, in the calendar year 2022 (CY22), Nifty50 is down by only 1% now.
The recovery was led by abating inflationary concerns due to softening in commodity prices including metals, crude oil, palm oil, etc.
The selling intensity of FIIs also abated in July when the FIIs net sold in cash to the tune of ₹6,568 crore as against their monthly selling run-rate of ₹20,000-60,000 crore in the last nine months.
In Q1FY23, results from the companies so far have been mixed. Nifty50 valuations are closer to a historical average of 19 times one-year forward.
The market has also largely digested recent rate hikes in US and India and another 50-75bps before Dec’22. It appears we have made the bottom for the year and August could turn out to be a mildly positive month.
However, a period of consolidation or time correction amidst volatility is anticipated in the near term before we start making bigger moves.
Inflation might have peaked but no one knows if it has stabilised. Is it still risky to play the consumer theme?
There are different aspects to the consumer theme and one can play it through quasi-discretionary or discretionary as well. Certain categories are coming out of the woods post covid and there seems to be an augmented demand.
Consumers continue spending on discretionary categories like travel, entertainment, dine-out etc.
Globally, several retailers have slashed guidance post recent earnings amidst inflation woes.
However, while margin pressures could persist in the near term back home, the demand environment looks steady and is likely to witness a boost with an earlier festive season this year.
Do you think that the next leg of a rally will see a shift in market leadership? What sectors can be at the front?
IT which was the best performer of the rally in 2020 and 2021, is grappling with concerns about the odds of a recession in the US which may impact tech spending.
The metals rally has cracked following the sharp correction in metal prices. Financials have been impacted by the relentless FPI selling despite good performance.
Nifty FMCG is up by over 17% during the last six-month period and outperformance is mainly due to low FII holding and a decline in input prices.
Nifty Auto rose by over 13% during the same period owing to robust demand in commercial vehicles and passenger vehicles and the easing of chip shortage issues.
With the strong comeback seen in FMCG, and auto and continued weakness seen in commodities and IT, the next rally will have to be driven by BFSI and consumption that showed outperformance in July.
Two sectors- IT and auto - have been catching attention for different reasons. What is your view on these sectors? Please pick your favourite stocks from these sectors.
We believe IT can emerge as a dark horse sooner than later, as demand visibility is robust for the next one-two year. The FII sell-off within IT in the last one year has been mainly driven by high valuation, sector rotation, attrition issues, and the recent recessionary concerns in the US.
All these issues are more or less stabilizing as currently most of the companies are now trading close to their historical averages, attrition will take a quarter or two to cool off as per management commentaries.
In terms of recession, we sense that even if that happens, it is going to be mild and short-lived. So, the pressure is likely to continue for a while. We prefer large-cap IT names versus mid-caps due to valuations.
The auto sector is seeing good traction during Apr-Jun 2022 due to cooling off in the key commodity prices such as steel, aluminium and copper and some easing in the availability of the semiconductor chips. We are seeing good demand recovery in the Passenger Vehicle, Commercial Vehicle as well as two-wheeler segments.
The upcoming festival season combined with the launch of new models is expected to keep the sector in limelight. We prefer Auto Ancillaries over Auto OEMs due to the potential for higher earnings growth. From a
long-term strategic allocation view, EV should emerge as a potential winner.
If I want to invest ₹10 lakh in equities at this juncture, what sectors will you recommend me to invest in?
The themes we like from a 1-2 year view are e-mobility, digitalization, China+1/PLI, financialisation of savings, and India’s per capita GDP tripling from the current rate of $2,000. We aim to identify companies that would best benefit from these themes playing out.
The e-mobility theme would benefit select stocks in the automobile sector, the China+1 theme would benefit stocks in the pharma, speciality chemicals and capital goods, among others. The PLI scheme would benefit both MSMEs and larger players.
Disclaimer: The views expressed are of the analyst and not of MintGenie.
