Rushabh Sheth is the Co-CIO and Co-Founder of Karma Capital Advisors.
“It’s hard to say whether the broader markets have fully priced in stagflation concerns. We definitely do not see a situation where India is expected to see growth slow down significantly, though some headwinds are clearly there,” Rushabh Sheth, Co-CIO and Co-founder of Karma Capital Advisors, told Moneycontrol in an interview.
With 29 years’ experience with 21 years in money management, primarily in listed equities, he says Karma Capital is overweight on sectors such as pharma, telecom and media, which have not been impacted much by rising inflation and higher commodity prices.
Sheth feels corporate earnings will continue to grow at a faster rate than the broader economy. And, “India is one of the few islands of growth even in a difficult environment for the world economy, even if the Indian economy witnesses a relative decrease in the pace of growth due to inflation.”
Edited excerpts from the interview follow:
Is it still a buy-on-dips market despite lot of headwinds in the last 3-6 months?
Oil prices, inflation concerns and the Ukraine war are certainly factors leading to volatility in the Indian equity markets. However, it’s important to note that there is significant long-term optimism pertaining to the Indian equity markets because the outlook for the Indian economy has improved as it emerges from the COVID-19 shock. The supporting regulatory environment and tailwinds from the long term structural growth trends in India, such as a large domestic market, favourable demographics and a maturing equity market, and an increasing likelihood that in the near to medium term more technology and manufacturing jobs will relocate to India from across the world, are all factors that will give long-term investors a wide set of opportunities.
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The rise in income levels will benefit many consumer discretionary products and services such as passenger vehicles, high-end electronics, etc. Or the recent financialisation of economy is surely going to spur unprecedented growth in financial services companies that target under-served markets using a combination of offline and technology-enabled interventions.
Further, there are many niche businesses in manufacturing and services that lead their respective industries with innovation, and tap new growth opportunities like exports, etc. Not to mention healthcare, wellness, and clean environment companies that could also benefit post pandemic since there is a renewed focus among individuals and family on health and wellness.
So, to answer your question, these dips could be used as buying opportunities in select stocks that may have corrected and are available now at reasonable valuations for investors with a 2-3-year or longer-term view.
In the near term, volatility is likely to continue. We at Karma Capital are seeing a lot of opportunities or stock ideas emerging in some of the themes mentioned earlier.
A few days back, people were talking about stagflation. Do you think stagflation fears are fully priced in now?
It’s hard to say whether the broader markets have fully priced in stagflation concerns. Stagflation is a combination of stagnating growth and inflation. From our perspective, we definitely do not see a situation where India is expected to see growth slow down significantly, though some headwinds are clearly there.
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Corporate earnings will continue to grow at a faster rate than the broader economy. And, India is one of the few islands of growth even in a difficult environment for the world economy — even if the Indian economy witnesses a relative decrease in the pace of growth due to inflation.
To give you a perspective, the consensus Bloomberg EPS estimate for FY23 for the Nifty companies stands at Rs 888 (EPS growth of nearly 20 percent from the previous financial year’s consensus estimates) even if this is diluted due to cost pressures it will be higher than many other economies.
In terms of inflation, India is far better than some developed countries. What is your view, after considering the current elevated commodity prices?
Inflation was a concern even before the Ukraine war and has now been aggravated. This uncertainty is likely to continue for the next few quarters since this is an extraordinary situation. Till this is resolved it is difficult to see commodity prices cooling off, hence leading to higher inflation. Inflation will impact all economies. However, the West has not seen inflation for 40 years and there it is trickier for them to handle.
After a significant runup in commodity prices, do you expect the first half of the next financial year to be challenging on a fundamental basis?
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The runup in commodity prices has impacted raw material costs and that, in turn, has certainly put pressure on corporate margins and profitability. Cost pressures will surely impact corporate earnings in FY23.
After a sharp sell-off across sectors during the recent turmoil, what is your pecking order in terms of sectors to bet on?
We at Karma Capital are bottom-up stock pickers and the sectors that we invest in are an outcome of the stocks that we like and invest in, on the basis of our primary research. In that context, we are overweight on sectors like pharma, telecom and media, which are not impacted much by rising inflation and higher commodity prices. And we are underweight on Financials — a sector that is usually impacted by higher interest rates.
How should investors position their portfolios as the ultra-low interest rate environment might be behind us?
In any sector that is sensitive to higher interest rates, investors should be more careful building meaningful positions currently, and also be more prudent allocating to any sector that is likely to see a bigger impact due to the increase in oil prices and raw material costs.
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