Sector rotation to continue in 2022; avoid firms with higher borrowing costs, says Mohit Batra of MarketsMojo

In the remaining six months of 2022, sector-rotation will continue, hence, emphasizing one sector may not be the right strategy to build wealth, said Mohit Batra, Founder & CEO of MarketsMojo. In an interview with MintGenie, Batra said that rate-sensitive sectors will continue to underperform for a significant time.

Edited excerpts:

Rate hikes are done and more rate hikes are likely. In the rising rate hike scenario, would you recommend investing in rate-sensitive sectors?

We agree that interest rates will continue to increase because inflation will remain stickier than one would imagine. If you look at RBI assumptions to predict inflation, they have assumed crude at $105 per barrel. 

However, crude is currently trading much above $105 per barrel. Hence, it could result in additional inflationary pressure coupled with food item prices going up internationally. 

Due to that, inflation could remain sticky and subsequently, the interest rate will rise much higher in the next few months. Keeping this factor in mind, we look at the historical evidence,

which suggests that rate-sensitive sectors tend to underperform compared to the overall market, be it the realty sector, capital goods, etc. We sense that rate-sensitive sectors will continue to underperform for a significant time. 

What are the sectors that one should consider investing at this juncture?

Looking at how the market has behaved in 2022, market-sector preferences have changed on a month-to-month basis. In other words, there are no clear-cut indications as to which sector could emerge a winner in the short to mid-year term. 

Hence, right now, we are suggesting a bottom-up approach wherein rather than looking at a sector approach, we recommend investing in a company that will make money for investors. 

However, we believe that for the remaining six months of 2022, sector-rotation will continue; hence, emphasizing one sector may not be the right strategy to build wealth. 

Inflation is high and the RBI has projected FY23 inflation to be around 6.7 percent. What should be the investing strategy in times of high inflation?

With regards to strategy, it is as discussed in the previous question. That means the strategy must remain stock specific. The sector that doesn’t need funds and in fact, the sector that generates a good amount of cash flow are the sectors to watch out for. 

Hence, some industries that are cash-rich such as IT companies that also benefit from depositing the rupee, are ones that investors must consider. 

In times of high inflation, we have seen that companies with poor corporate governance tend to underperform significantly compared to better-corporate governance companies. Also, avoid companies that have high borrowings in their books. 

We believe two things could happen in such a scenario: The earnings growth could come down due to a slowdown in the economy. Secondly, due to the borrowings in the books, the interest costs could rise, which could deteriorate their debt-to-equity interest-to-operating profit ratio. 

Hence, we suggest avoiding companies with higher borrowings cost in the books. 

Many analysts are worried about the trajectory of crude oil prices and the rupee. Where do you see the rupee in the next one year? What can the RBI do to save the rupee?

If crude oil prices are going to remain elevated, it is going to create pressure on import bills. If there is pressure on import bills, the rupee will depreciate against the US dollar. We sense that the rupee could eventually increase to 80 per dollar. 

To save the rupee, the RBI would need to come out with innovative measures to bring in more dollars, such as coming out with a dollar-denominated NRI deposit that could increase the flow of money to India. 

Auto stocks have been witnessing some traction of late. When inflation is high, rates are rising and the economic indicators are under pressure, what should one do with the auto stocks? Can it be a contra bet at this juncture?

We don’t think auto stocks could be a contra bet for the simple reason that when the interest rate rises, so do EMIs. Typically, most people buy auto vehicles through EMI. Hence, a high EMI could impact the purchasing power of people. 

The running cost of auto vehicles has arisen due to price hike in petrol and diesel. Besides, chip shortages continue to remain an area of concern. 

So yes, auto companies have done very well in the last couple of weeks, but they may continue facing headwinds. Hence, we do not believe auto stocks are a contra bet.

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