“We expect the RBI may want to first absorb the surplus liquidity from the system before it starts the rate hike cycle for better rate transmission,” Poonam Tandon, Chief Investment Officer at IndiaFirst Life Insurance Company said in an interview to Moneycontrol.
“We will not be surprised if we see a rate hike in the next policy meet if the inflation trajectory worsens severely,” she added.
The benchmark 10-year bond yield has begun pricing in the potential rate hike in the subsequent policy meets.
On valuation front, IndiaFirst believes the IT stocks are factoring most of the positives and hence they expect some consolidation in the space in the near term, said Tandon. Moreover, if the growth outlook deteriorates as monetary tightening starts in the US, then the sector, especially midcap IT companies could see underperformance given the high valuation, she feels.
Do you think, by any chance, Indian growth can fall below 7 percent in FY23?
We expect a recovery in FY23 to be broad-based assuming geopolitical and other unforeseen events do not pose a significant challenge. We do not expect growth to fall below 7 percent as we see factors such as revival in rural demand, capex push by government, and pickup in private capex to remain supportive of growth. Additionally, structural policy changes such as the PLI (production linked incentive) scheme, China plus one strategy are expected to limit downside risk to growth.
Do you still feel inflation is a bigger risk for the equity markets as RBI started focussing more on inflation as well as growth?
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In the April 2022 policy meeting, RBI has clearly prioritised inflation over growth due to the ongoing geopolitical situation, surge in crude oil prices, and rising input cost pressures. Certainly, we do see that the risk to Indian equity markets has increased over the last few months. Not only will higher energy/commodity prices have an impact on corporate profitability, but the bigger concern is the impact of rising prices on the demand. It’s unlikely that most corporates are expected to pass on the impact of higher inflation fully without impacting the top line.
How do you approach the banking & financial services space now given the rising expectations for a rate hike in the second half of FY23?
We are positive about the banking sector. Post the pandemic, the banking sector has seen improvement in its asset quality led by better collection efficiency and improvement in overall demand sentiment. This trend, in our view, will continue and is expected to further ease the headline NPAs (non-performing assets) resulting in a decline in overall credit cost. Moreover, rising interest rates will help banks expand their margin amidst credit growth pick-ups.
Do you expect the rate hike trajectory in India to start in the second half of 2022? Do you get any indication from bond yields?
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We do expect interest rates to increase in the coming months given the deteriorating global backdrop due to geopolitical issues that have severely impacted the commodity and financial markets. While RBI has kept the policy rates unchanged in its April policy, it has stated that its stance is ‘less accommodating’ and has changed its focus to inflation targeting from growth.
The benchmark 10-year bond yield has therefore begun pricing in the potential hike in the subsequent policy meets. We expect the RBI may want to first absorb the surplus liquidity from the system before it starts the rate hike cycle for better rate transmission. We will not be surprised if we see a rate hike in the next policy meet if the inflation trajectory worsens severely.
Also do you think Indian markets valuations are still expensive and will the expected change in stance by RBI put pressure on valuations going ahead?
In the past few months, Indian markets have seen time correction and Nifty Index earnings also have seen modest downgrades especially in the Consumer, Cement, and Auto sectors. As the external environment is still uncertain, we are closely monitoring the extent of higher inflation will weigh on the corporate profitability especially that of consumption sectors leading to further downgrades while cyclical sectors may see upgrades. In light of the changing dynamics, we would approach the markets with a stock-specific view and stick to companies that have better growth prospects, stronger balance sheets, high pricing power, and earnings visibility.
What are your thoughts on quarterly and full-year earnings announced by IT majors recently? Is it the time to go overboard on these stocks? Do you expect the Fed rate trajectory to impact IT space performance even as they have a healthy order book?
Till now we have only seen one IT major announcing its results. The demand outlook is expected to remain positive for the next couple of years. However, we see margin risk as a bigger challenge due to onsite revival, wage increases and resumption of travel cost. On the valuation front, we believe the stocks are factoring most of the positives and we expect some consolidation in the space in the near term. Moreover, if the growth outlook deteriorates as monetary tightening starts in the US, then the sector esp. midcap IT companies could see underperformance given the high valuation.
What are sectors to focus on and avoid in the current market environment?
In the current market environment, we expect banks to benefit from higher inflation and interest rates, Capital goods/Infra companies given the government focus on investment. We also continue to remain positive on the cyclicals. On the other hand, we would likely avoid the consumption space – FMCG and Auto.
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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