Rupen Rajguru, Executive Director and Head of Equity Investments and Strategy at Julius Baer, expects the beginning of a new economic cycle, led by a strong financial system and coupled with a healthy corporate balance sheet, would gradually lead to fiscal consolidation.
On the RBI monetary policy, Rupen, who has over 19 years of experience in the Indian capital markets, said the Monetary Policy Committee did a good balancing act between accommodation and liquidity tapering. “From an impact perspective, we expect the yield curve to gradually shift upwards as the RBI is mindful of not disrupting the bond market or the liquidity situation.”
Is it the time to be more bullish on the IT space, especially after the TCS earnings?
IT has been one the best-performing sectors for over the past 15 months, driven by robust earnings momentum and strong growth outlook, supported by a healthy deal pipeline. In fact, the pandemic has turned out to be a boon for the sector with compression of the timelines in terms of budgeted IT spends and acceleration in decision-making by corporates especially in cloud migration and digital transformation.
Regarding TCS, although there has been a small miss in terms of revenue growth versus consensus expectations and moderation in deal wins, the overall commentary remains quite constructive with the company expecting the overall momentum to sustain with growth across verticals. Overall, the key monitorable for the IT sector will be the demand and pricing environment, deal pipeline build-up and margin outlook in the face of rising employee costs.
What is your reading on the RBI Monetary Policy and the commentary by the RBI governor?
While the RBI did not initiate any rate action or change in the accommodative stance, the key takeaway from the policy is that it has started the process of normalising liquidity as there has been no announcement of further G-SAP (G-Sec Acquisition Programme). In addition, the RBI has raised the quantum of the fortnightly VRRR (variable reverse repo rate) auctions to Rs 6 lakh crore (from Rs 4 lakh crore) which would effectively bring down the surplus liquidity in the system to about Rs 2-3 lakh crore by December.
Overall, the MPC did a good balancing act between accommodation and liquidity tapering. From an impact perspective, we expect the yield curve to gradually shift upwards, as the RBI doesn’t want to disrupt the bond market or the liquidity situation.
Moody’s has changed India’s ratings outlook to stable from negative. Does it mean that risks for the financial sector are lower now along with visibility of sustained growth and gradual fiscal consolidation?
One of the primary reasons cited by Moody’s to change the outlook to stable is that the downside risks from negative feedback between the real economy and financial system are receding. Besides, the health of the Indian financial sector is now much better than even pre-Covid, as the banks are now well capitalised and have more than adequate Covid-related provisions in their books which, we believe, will pave the way for a new capex cycle.
Overall, we expect the beginning of a new economic cycle, led by a strong financial system and coupled with a healthy corporate balance sheet that would gradually lead to fiscal consolidation.
US Treasury Secretary Janet Yellen has warned that a US debt default could trigger another recession, as an October 18 deadline approaches. Do you feel so, and what is your view?
In the US, we have seen over the years that there is always heightened political activity when there is voting on increasing the US debt ceiling limit. The US government has never failed to honor any of its commitment and the US treasuries are viewed as the safest asset. Hence, based on history (around initial political arm-twisting and then ultimate agreement in increasing the debt limit), we would assign extremely low probability to a US debt default.
Several PSU, including oil, power and coal, saw a big run-up in their stock prices. What are the reasons for this rally? Is the under-ownership one of reasons for the run up?
The general characteristic of a bull market is that there is a rotation into the underperforming sectors. Over the last few years, a lot of state-owned companies, especially energy and utility stocks, have significantly underperformed the broader markets primarily on account of low ESG (Environmental, Social, & Governance) score, which led to lack of investing interest from the FPIs (foreign portfolio investors).
Over the past few weeks, oil and coal prices have gone up significantly globally on back of supply side issues; this has led to significant improvement in the earnings outlook of some of the energy companies. So, the trinity of rising commodity prices coupled with under ownership and undemanding valuations (<10 PE, > 4-5 percent dividend yield) has led to price momentum in the PSUs.
What are the key factors one should consider before picking stock and creating a portfolio of stocks?
Firstly, an investor should have a long-term horizon if he/she chooses to invest in stocks. Stock investing is akin to investing in the business, and hence the two important aspects to consider are: Quality of business and Quality of the management.
In quality of business, the factors to consider are – Is the business capital intensive or asset light? Is the business structural or cyclical? Is there some niche or moat that the business is offering? Generally, businesses, which are capital light and have structural growth prospects have created good long-term wealth for investors.
Similarly, the management, which have shown good execution capabilities, are high on ethics/governance, and have treated minority shareholders equitably have also rewarded shareholders (provided the quality of business is also good).
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