Commodity IT companies in India likely to benefit from US infrastructure plan: Kanika Agarrwal of Upside AI

Market Outlook

Upside AI co-founder and Chief Investment Officer Kanika Agarrwal is of the view that the US infrastructure push can result in greater demand for Indian commodity companies and large contracts for Indian IT players.

Agarrwal, whose inspiration for Upside AI came from Benjamin Graham’s The Intelligent Investor, founded the fintech startup on the belief that technology makes better decisions than humans as machines are unbiased and unemotional.

A big votary of fundamentals when it comes to picking a stock, Agarrwal in an interview to Moneycontrol’s Kshitij Anand says there are sufficient tailwinds for equities to continue to do well. Edited excerpts:

What is your view of MPC’s April meeting?

The RBI’s first MPC of FY22 was in line with market expectations. The worry is that the delicate balance between recovery and inflation which the RBI must maintain.

CPI is already at 5 percent and real interest rates are negative. This is something central banks globally will struggle with for the next couple of years—jump-starting the economy versus stoking inflation.

The clincher from the MPC was RBI’s announcement of a G-Sec buying programme for better yield curve management. Given the uncertainty for the next couple of quarters, the expectation is that the RBI’s stance will remain accommodative and there should be sufficient liquidity in the system.

The Archegos fire sale is a reminder that we live in a world that is vulnerable to external shocks. What does it mean for Indian markets and offshore derivative instruments?

I think this year we have seen multiple single events wreak havoc on the world economy, just pointing us to the fragility of our systems—whether it was the GameStop rally, Ever Given or Archegos.

Archegos was yet an example of highly levered positions going wrong. While this will have some quarterly earnings pressure on Archegos’ brokers, the impact on India is limited.

Even generally, this looks like a short-term event causing minor impact – there is too much liquidity in global markets for this to cause a 2008 type of crisis.

How will US President Joe Biden’s multi-trillion-dollar plan to rebuild America’s infrastructure play out in Indian markets?

If the US does in fact execute as announced, in the words of President Biden, “this is a once in a generation investment in America”, this will mean higher demand for commodities, higher disposable incomes in the US.

What this implies for India is, hopefully, greater demand for our commodity companies, potential large contract wins for IT services, etc, especially given the US’ tension with China, hopefully, we see a lot more share of wallet.

What is your outlook on markets for FY22? Which asset class can outperform?

We remain very bullish on equities—our flagship product is mid and small-cap-focused and delivered 80 percent in FY21. In FY22 while the levels of volatility from FY21 will remain, I believe there are sufficient tailwinds for equities to continue to do well.

Currently, our portfolio is weighted towards metals, chemicals and engineering.

Global index service provider FTSE Russell has placed Indian government securities on its watch list for inclusion in its emerging markets government bond index. What kind of money can come in from foreign investors?

Experts are estimating around $ 10 billion of inflows from the inclusion. While this will help with accessibility, the marketability of our instruments remains our responsibility.

Overseas investors have been net sellers of rupee debt in 2020 and 2021, so far. Therefore inclusion in the index is a very welcome step, it is not a sufficient condition for fund flow.

We closed March on a flat-to-positive note. How is April likely to pan out for investors? Any big events to track?

Triggers remain similar to the last few months, ie control of COVID cases and vaccine rollout. Negative triggers for the month are the lockdown in Maharashtra, news flow about migrants heading back to villages and a weaker PMI.

Having said that, we believe these remain short-term pains. The year’s trajectory on recovery and dealing with the virus looks good.

The dollar is near a five-month high, while US bond yields, too, have moved up. What will be the impact on commodities and commodity-linked stocks?

We have been bullish on commodities since December. The broad consensus seems to be that we are heading into a commodities supercycle given the pent-up demand in the world economy, zero interest rates, and liquidity in the system and the USA infrastructure plan.

Further, given government and corporate commitment to reducing our carbon footprint, there should be a heightening demand for certain metals.

Having said that, it is not going to be a secular upcycle–the world is looking to reduce dependency on oil and coal as it turns greener.

Therefore, like with any other “trend”, there will be pockets of winners and losers. Sectors, where oil and coal is a raw material, or companies focused on ESG manufacturing or recycling are interesting to us.

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