Jitendra Arora, Senior EVP and Fund Manager – Equity, ICICI Prudential Life Insurance Company is optimistic about the Indian market for the medium to long-term prospects. In an interview with MintGenie, he said financials, telecom, capex plays and some discretionary sectors like organised retail and QSRs offer good investment opportunities given the long runway for growth.
Do you think the market has fully discounted the Fed rate hikes?
It will be difficult for anyone to predict with certainty whether the market has fully discounted the Fed rate hikes. Economists and market participants have estimates for the rate hike trajectory that the Fed is likely to follow based on factors like inflation, growth, employment etc. These estimates have stabilized over the last couple of months.
However, the trajectory may evolve to take into account the changes in the macroeconomic conditions that will be influenced by other factors as well. The markets would keep pricing the trajectory based on data that emerges.
Hence, inflation, employment, growth, geopolitical events, etc., will be closely watched over the next few months to assess the Fed rate hike trajectory.
Besides, these variables would also influence corporate earnings which would further impact the markets.
A recession in the US looks almost certain because of the Fed tightening. What will be the impact on the Indian market?
The recession in the US is likely to have various implications for India’s economy. On the one hand, we are witnessing demand for exports declining, affecting sectors like IT services, chemicals, textiles etc.
On the other hand, it is likely to lead to a respite in energy prices (as witnessed recently) helping reduce our expenditure on it, leaving additional money in the pockets of domestic consumers to spend on other things. The Fed tightening may also evolve if growth falters more than the current estimates.
Therefore, markets may remain volatile for some time, but the medium to long-term drivers for Indian markets remain intact, making us positive over this time frame.
Keeping high volatility in mind, what can be the ideal strategy for this market? Should we sell on the rise?
Volatility is inherent to equity markets and should not be the key consideration to invest or sell. For a retail investor, asset allocation in line with the investment horizon and risk appetite is of paramount importance rather than trying to time the market based on multiple factors like valuations, flows, rate cycle etc.
Therefore, an investor at the end of the investment horizon (less than one year) may look to sell. However, an investor who has an investment horizon of more than two years may continue to hold onto equities and invest systematically.
We are convinced about the medium to long-term prospects of the Indian markets and believe that Indian equities are likely to deliver double-digit growth over the next decade, remaining a good investment avenue for a long-term investor.
What is your view on the domestic cyclical? What sectors are you bullish on?
Given the uncertain, global demand environment and better relative domestic growth, at this point, we primarily like domestic-focused sectors over sectors dependent on external demand.
We think financials, telecom, capex plays and some discretionary sectors like organised retail and QSRs offer good investment opportunities given the long runway for growth.
Indian banks are likely to witness double-digit earnings growth with relatively clean balance sheets and healthy ROEs given high nominal growth and the relatively low credit penetration in India.
This makes us positive about the sector over the medium to long-term. Given the healthy growth over the last few years and little private capex, we can see that domestic capacity utilisations have crept up.
This coupled with a focus on the production-linked incentive scheme (PLI) will likely ensure a healthy capex cycle, making this sector look positive. We also like select auto names at this point given that we see some recovery in the domestic auto demand, especially four-wheelers and commercial vehicles (CV).
What is your view on the FPI trend? Do you think they will keep buying while the Fed continues lifting rates?
The decision of FPIs to invest in the Indian markets is akin to any other investor. It depends on flows (if India dedicated funds have flows then they will invest), the relative attractiveness of Indian markets in terms of growth, valuations and the global macro-environment.
In the last financial year, the Indian markets witnessed selling by FPIs as valuations appeared high as compared to other emerging markets. Consequently, investors chose to invest in China while selling Indian equities.
However, given the subdued economic growth on account of the zero Covid policy in China and better relative growth of the Indian economy, India has started looking attractive again. As a result, we believe incrementally FPIs may not be sellers of Indian equities unless compelled to do so on account of outflows per se.
Disclaimer: The views and recommendations given in this article are those of the analyst. These do not represent the views of MintGenie.