Growth prospects for the IT sector are vibrant for the next two years but the valuation of the sector captures most of its positives, feels George Heber Joseph, CEO and CIO at ITI Mutual Fund.
Heber predicts consolidation in the IT sector in the near to medium term and expects the sectoral index to underperform the Nifty.
In the current scenario, he feels, it is better to take sector neutral bets and keep the asset allocation decisions in an extremely disciplined way. “We believe equity and real assets like real estate and gold are good asset classes to be in this kind of inflationary environment,” he shares in an interview with Moneycontrol. Excerpts from the interaction:
What are your thoughts on the March MF flow data? Do you think retail investors’ support to equity market is going to increase considerably in the coming years?
The March 2022 data suggests that equity flow continues and there were redemptions from debt funds. For investors’ equity funds is the only option to invest so as to achieve inflation adjusted returns.
Retail participation has cooled off a bit in the last three months. This could be because of the losses retail investors had to bear from the recent IPOs. I believe retail investors’ participation will further come down over a period of time as the work from home concept reduces and liquidity tightens.
What should be investors’ strategy now? Is it the time to be cautious and stay with capital given the lot of headwinds ahead?
The external environment is quite unpredictable and not easy. Therefore, investing into equities or other asset classes need more discipline than before. Globally inflation and interest rates are moving up, energy prices are at elevated levels, easy liquidity period is over and are bound to tighten as we move forward.
In this context, it is better to take sector-neutral bets, and keep the asset allocation decisions in an extremely disciplined way. We believe equity and real assets like real estate and gold are good asset classes to be in this kind of inflationary environment.
What is your take on the RBI policy and do you get any sense about rate hikes?
The RBI is following a pro-growth strategy. We believe the RBI won’t increase rates in the near term. Crude oil price cooling off from the recent peak levels also would have supported the decision of not changing rates. Our belief is that rates would be maintained at current levels unless push comes to the shove.
Do you think the IT sector will continue to consolidate at these levels or will there be sharp outperformance in coming quarters?
As per all prominent IT consulting firms, the sector is bound to do well and poised to see a good growth for the next couple of years. IT services and ITES are supposed to grow with the cloud migration, outsourcing and digital push by various firms are on. So, we are positive on IT sector growth prospects in the coming two years but the valuation of the sector is capturing most of the positives that is expected from the sector.
Therefore, there will be consolidation in the sector in the near to medium term and probably could underperform Nifty in the near to medium term. If growth falters because of US rate hikes then the sector can see prolonged underperformance.
How should one look at the financial space including housing especially after the big news of HDFC and HDFC Bank merger?
There are many changes which can happen in the sector. One of the best AAA-rated NBFCs has gone out of the bond market which can give more preference to other AAA-rated NBFCs in the market. This is beneficial for those AAA-rated NBFCs in terms of availability of funds and borrowing costs.
Formation of large banks always reduces the impact of systemic challenges and reduce the sectoral risks associated with it.
Is it the time to bet on commodities consumers than commodities producers?
We do expect the energy prices can be higher for longer periods as the reasons for increase in prices are not reversing fully in the near term. Commodity users like staples are anyways trading at steep valuations so may not be ideal to invest. Probably some of the discretionary names could be looked into which are trading at cheap valuations to play the commodity cooling off trade, but the benefits can be gradual and not immediate.
This time around the reasons for commodity rally is quite different from what we have seen in the last 50 years and we are of the opinion that some of the commodity players are well placed to make decent returns in the coming quarters than commodity users.
So, being invested in select commodities like coal, aluminium and steel can be beneficial in this kind of scenario.
In the consumption basket, how do you approach auto space that is facing lot of headwinds?
The auto sector has gone through multiple headwinds because of semi conductor issues, COVID slowdown, disruption because of electric vehicles (EVs) and now high energy prices led growth destruction. Overall the sector has been impacted massively.
We think that many stocks in this sector are available very cheap but needs to be seen carefully where the terminal value can be zero. Some of the cheap names may see existential crisis as the world order is changing, so all cheap ones may not be a great buy as well.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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