There are many variables that will decide the course of the market. In the current market scenario, value is outperforming growth, said Narendra Solanki, Head of Fundamental Research and Investment Services, Anand Rathi Shares & Stock Brokers, in an interview with MintGenie. He also shared his views on the banking and IT sectors amid evolving scenarios.
What are your thoughts on the domestic market? Are we going to end the year with a double-digit gain?
I think for Nifty50, it looks difficult as the major triggers which are earnings have just ended and a lot of expectations for the current financial year have been priced so far.
Now for double-digit gains, we are looking at about a 4% to 5% kind of move from the current levels and now a lot is dependent on domestic macro and global events, especially around the US Fed rate hike and inflation expectations and, of course, the Ukraine crisis. So, there are a lot of variables needed to fall in place for that to happen.
In terms of US inflation, the latest data has suggested the start of a decline but still, it is some months away from it to reach within Fed’s tolerance limits.
Should investors be worried about the current premium valuation of the market?
I think premium valuations are justified as long as the earnings growth remains strong and companies are able to sustain the momentum in the medium term. In many companies, we have seen that markets have punished them for lack of earnings growth.
However, India, if we compare it to the developed world or even emerging markets, has historically demanded higher relative premiums in valuations and that should sustain.
India's retail inflation fell to a three-month low of 6.77% in October. Even in the US, the latest inflation prints came below expectations. How do you read this? Is the worst behind in terms of inflation? Are we going to see a pause in rate hikes sooner than expected?
The October 2022 retail inflation at 6.8% reversed the spike of the previous month.
Despite several upside risks and the unfavourable base for food and fuel, retail inflation seems to have passed the peak. A rapid cooling off is unlikely given the base and current momentum.
With duty and tax cuts on petroleum products and the ban on some food exports, drivers of inflation seem to have shifted from global to domestic factors.
With retail inflation above the RBI’s comfort zone, rate hikes would continue. Another 50-60bp rate hike is still on the cards although a pause or a small hike is likely in the next policy.
Value or growth stocks- what is your favourite currently? Please elaborate on your views.
In the current market scenario, value is outperforming growth. Explaining simply, a rising rate regime acts as a deterrent to the growth stocks because the cost of funds increases and simultaneously consumption which fuels growth also slows down.
Hence, both the engines which actually give growth stocks their premium over value start acting against it.
While value stocks which were anyways are trading cheaply compared to their growth counterparts also added the advantage of a higher margin of safety embedded in them as compared to growth stocks during such a regime. Hence, markets favour value more in the current setup.
Banking stocks have gained stupendously. Is it time to be cautious about them? What should one do with banking stocks- buy, hold or sell?
I think baking as a sector still has the potential to outperform as we are just in the initial phase of the growth cycle where credit growth is picking up gradually and also NPA situation is now behind us. So, banks have room to grow.
However, I would be preferring large size banks in the current setup with a higher rate which could accelerate the fight to garner greater deposits which are relatively easier for larger banks.
What are your views on the IT sector? Should one bet on it?
I think the worst is over in terms of valuation reset, however, it could take some more time to regain lost ground. Overall, growth is there in the sector but long-term visibility has reduced due to global uncertainty. One could look to add good companies gradually over time.
If the market embarks on a fresh bullish phase, what sectors can lead the next leg of the rally?
I think the broad theme could remain the same that is more domestic-oriented sectors, import substitution, and export market share gain i.e. China. In addition to that, financials could also prove to be a proxy as has been historically for overall growth.
Disclaimer: The views and recommendations given in this article are those of the analyst. These do not represent the views of MintGenie.