Global sentiment towards risky assets is worsening and therefore we have been seeing persistent FPI selling in India. We believe Indian market will continue to be volatile for a few more months,” said Roopali Prabhu, Chief Investment Officer and Co-head Products & Solutions of Sanctum Wealth in an interview to Moneycontrol.
Roopali Prabhu has more than 20 years of experience in capital markets. Before Sanctum, she was co-head for managed products at Morgan Stanley Wealth.
She feels green infrastructure could emerge as a decadal theme with structural tailwinds. However, “in the immediate future, the world is also taking notice of greenflation that is emanating out of implementation related complexities of greening the world”, she said. Edited excerpts:
Do you think there could be a risk of stagflation for India considering the rising inflation?
India’s GDP growth for the current year is projected to be above 7.5 percent even as inflation could average closer to 6.25-6.5 percent for the year. This scenario doesn’t qualify as potential stagflation. This also doesn’t mean every household will experience this evenly. We believe, the lower and lower-middle income groups will feel the pain of inflation in a more pronounced manner as food and energy prices are most impacted.
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A lot of concerns including inflation, higher oil price, beginning policy tightening, and geopolitical tensions keep the market volatile, but failed to pull down sharply. What are your thoughts?
We believe markets will continue to be volatile for a few more months. Global sentiment towards risk assets is worsening and therefore we have been seeing persistent FPI selling. On the other hand, India’s longer term prospects are appealing and India is also witnessing a wave of financialization. This wave is what has cushioned the impact of persistent FII selling.
Given the higher inflation and we are entering into a higher interest rate environment, do you think there could be a large earnings downgrade in the coming period?
Corporate India has been deleveraging balance sheets over the past several years. Therefore, higher interest rates will not be a pain point. Inflation and demand response to inflation are parameters we are looking at far more closely.
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We anticipate margin pressure over the next couple of quarters at least. Particularly Consumer companies will feel the impact of rising raw input costs and potential demand rolling over in case of significant price hikes being passed on to consumers. IT and Banks however appear relatively insulated for at least the next couple of quarters. Earnings downgrade in these sectors could happen in case of prolonged and material slowdown in the global and domestic economy.
What are the key themes that you are backing right now?
We tend to focus on structural, multi-year themes as part of core portfolios. We have been constructive on manufacturing, housing, and formalization as themes. Government push to manufacturing through Atmanirbhar Bharat, move by global MNCs to diversify supply chains is only beginning to play out.
The housing cycle revival after 8 long years of the downturn is also in its initial stages and typically once it turns around lasts for 6-8 years. Lastly, the formalization wave that started with GST and India stack is enabling growth and market share consolidation for organized players.
The theme is nowhere close to maturity as the unorganized sector comprises 40-50 percent of several sectors even today. India’s start up ecosystem has leapfrogged in the last 2 years with a 3x jump in the number of unicorns. All the investments these companies attract are being spent on a further formalization of the economy and even creating new market segments.
How do you read the IT space that butchered badly after Infosys quarterly earnings? Is it the time to bet on IT?
The recent results from Infosys were weaker than street expectations and led to a selloff in the IT sector, which has been one of the best performing sectors over the past year. Management commentaries in the IT sector suggest margin headwinds led by wage rise and high attrition levels. Also, post-pandemic, resuming travel and return-to-office related costs will need to be considered. Macro risks around inflation and geopolitical tensions have worsened over the last quarter which could impact technology budgets to a certain extent.
Despite these challenges, growth remains stable to positive as the revenue growth outlook for the sector remains strong, particularly aided by demand for transformational services and cloud adoption. The deal pipeline and client addition are encouraging. Post the recent correction, valuations have come off from its highs to median valuations of 21x-22x P/E multiples and midcap IT is trading at 26x-27x P/E multiples.
Do you think these newage tech companies listed in 2021 are available at attractive valuations now?
FY21 saw a flurry of new age tech companies and IPOs posting stellar returns upon listing. But recently most of them have lost their sheen and have significantly underperformed. These companies were enjoying rich valuations as interest rates were low. Although several of these companies have business models that hold promise, there are near term issues. With concerns of inflation dampening spends, rising costs, challenges in the path to profitability get pronounced. Valuing such companies (almost all of which are loss making) in an uncertain environment is also a challenge and hence these also tend to be volatile.
Do you think green infrastructure is the emerging theme where one should start taking exposure now?
Green infrastructure could emerge as a decadal theme with structural tailwinds. However, in the immediate future, the world is also taking notice of greenflation that is emanating out of implementation related complexities of greening the world.
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