Suresh Soni, CEO, Baroda BNP Paribas Mutual Fund is positive about the Indian economy but he hinted that the global factors and rising capital costs could weigh on the market.
He said he like banks as he expects credit growth to sustain in the coming time. Structurally, the NPA cycle has peaked and banks have good provision coverage with enough capital to fund growth. So, structurally, too, they are well positioned, he said.
What is your take on the current market structure? Where do you see Nifty by the year-end?
We are witnessing heightened volatility around the world. The developed world is grappling with the highest inflation in the last four decades which is prompting central banks to aggressively raise rates. This in turn is stoking the fear of recession and leading to volatility in financial markets.
A sharp increase in US dollar interest rates has led to significant pressure on currencies and emerging markets. India has, however, done significantly better during this time.
Our inflation, though high, has been relatively manageable and the economy has shown remarkable resilience.
We believe, given the large domestic base, our economy is likely to remain relatively less impacted by the anticipated global slowdown.
However, foreign capital flows are more closely linked to the global environment and can remain volatile. RBI continues to mirror the global central bankers' rate action to temper volatility in forex markets.
In our view, though the earnings momentum would be largely secure for FY23, the rising cost of capital could temper valuations for markets.
Earnings growth is likely to be in the low double digits. We see the Nifty being more range bound into the year-end.
What should be the strategy for mid and smallcaps? Should investors bet on them despite the prevailing uncertainty or stock to largecaps only?
Asset allocation to a particular market cap or to a particular theme should be mapped to the risk profile of the investor and the time horizon of investment.
Within the midcap and smallcaps of today, there are the potential large caps of the future. Midcaps and smallcaps benefit from both – better growth as well as multiple re-ratings.
As the focus is on identifying the winners of the future, midcap and small cap need to have a bottom-up approach from a portfolio perspective.
Most of the current market uncertainty emanates from global turmoil. Unlike largecaps, midcaps and smallcaps have more stock-specific drivers and therefore their performance can be deviant to broader markets.
Lastly, from a foreign ownership point of view, this space also has significantly lower salience than large caps.
We believe that the current phase of uncertainty and resultant volatility could present a good opportunity for investors to add mid and smallcap funds to their portfolios with a long-term perspective.
Can we take a contra bet on IT now as they are down significantly? Is the risk of recession to the sector overblown?
The IT sector has underperformed the broader index on a year-to-date basis by around 30%. The key concern is the global macro slowdown and its Impact on global IT spending.
Indian IT service providers have also seen margins contraction led by higher employee costs.
While we could see near-term revenue pressure from the global slowdown, the structural story led to the shift to the cloud and digital transformation is intact.
We believe margins could improve from hereon as some of the cost pressures, like employee costs, start easing.
IT stocks have corrected and valuations in a few cases are nearing long-term average levels.
Considering the strong free cash flow generation, valuation on an FCF yield basis is turning attractive.
Structurally Indian IT businesses have a strong case to sustain the growth momentum. However, a slowdown in global growth in the near term may weigh on stock returns.
There seems to be a shift from IT to banking. What is boosting the banking sector? What is the road ahead for it?
Sectoral shift happens after comparing earning growth, valuation, and stock price performance. IT had outperformed nifty last year due to better earnings growth.
However, the IT sector has seen some downgrade in earnings with issues relating to cost and further spending due to global issues.
On the other hand, the fundamentals of the banking sector have improved in recent times.
Banking system credit growth is now the highest in the last nine years at 15.8%yoy. And this growth is broad-based- across mid-corporate, small-corporate, retail and services. Indian Banks are well provided for stress assets and the loan book seems to be clean as compared to the previous cycle.
During Covid, most of the private banks have also raised capital and are well capitalized.
On the ALM side also Banks are also well positioned. In the last two years, the banking sector has underperformed the broader market.
Hence attractive valuations combined with improved fundamental has led to buying in banking & financial services counters.
Everybody is saying this is India's decade. Do you agree? What are the major challenges that can spoil the party?
From a growth perspective, it is clearly India’s moment under the spotlight. Most of the western world is witnessing anaemic growth rates and global transnationals are looking toward diversifying supplier risks whether it be -China +1 or Europe +1.
India is not only the 5th largest economy but also the fastest growing economy globally. While the services sector has led growth in the past decades, there is an increased focus on the manufacturing sector now.
The Indian manufacturing sector has an opportunity to cater to the large domestic consumer base as well as the global transnational.
This is further aided by conducive governmental policies such as PLI (electronics, mobile phones, white goods, textiles, etc.) or indigenisation (for example defence) giving critical mass to a variety of industries. India has rightly focussed on raising the productivity potential of the economy over the last decade.
Reforms like GST, RERA and Bankruptcy code have led to cleaning up and increased formalization of the economy.
While we are the 5th largest economy in the world, on per capita income we don’t even rank in the top 100 countries.
We need to create more employment opportunities and focus on improving living conditions and education for our people.
Also, while we have leapfrogged in digital infrastructure, our physical infrastructure has a lot of catching up to do.
We can’t expect to be a force in manufacturing without skilled manpower and good infrastructure.
What sectors are you investing in at this juncture? Why are you positive about them? What is the time horizon that you are following?
India appears to be an island of growth in a volatile world. We are the 5th largest economy and are also the fastest growing economy in the world.
Accordingly, our investments are more tilted towards domestic stories. We like banks as we expect credit growth to sustain in the coming time.
Structurally, the NPA cycle has peaked and banks have good provision coverage with enough capital to fund growth. So, structurally, too, they are well positioned.
Domestic consumption could see the tailwinds of falling commodity price-both hard and soft commodities.
The long-term story of premiumization, under penetration and favourable demographics continue.
Finally, we are seeing early signs of capex revival. In the near term, we have seen Industry’s capacity utilization improving leading to corporate India planning to augment capacity.
Long term we see ESG-related investment fuel investment in large projects. Plans announced by leading corporate houses seem to have requisite equity capital.
What is your view on the rupee? The dollar is rising due to rate hikes by the US Fed. Can we see the rupee beyond 85 a year down the line?
In recent times, we have observed the rupee weakening versus the dollar. However, this must be seen in the global context.
The rupee has depreciated by about 10% while some of the leading currencies like the euro, pound, yuan and yen have depreciated far more than the Indian rupee. It is not really a weakening of the rupee but the strength of the dollar.
Clearly, while India’s growth story is driven by domestic factors, due to financial linkages with the global economy, interest rate hikes in the US impact the forex flows and have resulted in the weakening of the rupee.
We have an adequate foreign exchange reserve. While the current account deficit has been rising, India has been able to attract healthy FDI flows and has been the recipient of consistent NRI inflows.
Our software exports now exceed $100 bn per year. All this has helped cushion the impact of high oil prices and ensured an orderly movement in the rupee relative to other currencies.
Disclaimer: The views and recommendations given in this article are those of the analyst. These do not represent the views of MintGenie.