Santosh Joseph of Germinate Investor Services LLP
India could be very close to the peak for inflation, but it may take slightly longer as inflation tends to be stickier before it gets unwound, says Santosh Joseph of Germinate Investor Services LLP in an interview to Moneycontrol.
The year 2022 has been an extremely volatile so far owing to so many reasons, from Russia-Ukraine war to inflation to interest rate hikes that stir volatility. Now with rising geopolitical tensions across the world, it is not the best environment for the markets to either be stable or do well, he says, based on his over 17 years of experience in the sphere of asset management, banking and insurance.
The founder and managing partner at Germinate Investor Services LLP says there are enough reasons to believe that IT sector may be closer to the bottom and how badly recession will impact the IT industry is to be fully assessed.
Hence definitely, the IT is today a much better pack in terms of relative valuation to be considered than what it was maybe about a year ago, he adds. Excerpts from the interview:
Do you think the geopolitical factors may bring sharp corrections in the equity markets in coming months?
The markets are fragile as we speak and we’ve been seeing extremely high bouts of volatility. Any further escalation in geopolitical tensions will have a bearing on the market. 2022 has been an extremely volatile year so far owing to so many reasons, from Russia-Ukraine war to inflation to interest rate hikes that stirs volatility, and now with rising geopolitical tensions across the world, it is not the best environment for the markets to either be stable or do well.
Therefore, any fresh escalation of political tensions will have an impact on the market. The market has been through a lot and though it may seem real resilient, these issues will still have an influence on the market.
Will the inflation worries remain in the second half of the financial year or is it near its peak now?
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Inflation worries are going to persist for some more time. Specifically because the headline number is so high and the world hasn’t seen this kind of high inflation in a while now. It’s not going to cool off in a hurry.
Though we may be very close to the peak as we speak but it may take slightly longer as inflation tends to be stickier before it gets unwound.
Therefore it’s safe to say that we may be closer to the peak but it may take slightly longer than anticipated for inflation to cool and go to the normal levels that we expect.
The US is likely to see recession in the coming financial year. Do you agree or will you wait for more economic data points to build your view?
The probability of the US going into recession considering the way the interest rate hike has happened and the way we’ve seen the headline numbers, it’s quite possible that the US might be in a recession. There is a big difference between how people see it. Some people see it as a quick, sharp and short one whereas some people see it as long, sticky and an ugly one.
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To be honest, we’ll only come to know in time because we live in very unprecedented times, on the back of low interest rates and interest rates rising to extremely high inflation. It is a very difficult time to gauge.
Irrespective of how this will play out, one thing we know is that many of these things can sometimes play out more faster than most of us can imagine or anticipate. While the US may go into recession, the severity of it and how full-blown it will is yet to be measured in its entirety.
Do you expect more correction in IT stocks given the rising recession fears or are these concerns already priced in?
The IT industry has already come off a lot in the last eight-nine months and most of the stocks are at 52-week lows and index too is down to 52-week lows. At some level with so much of the recession fear is either priced in or already peaked out in terms of pricing. There are enough reasons to believe that we may be closer to the bottom in terms of the IT industry and how badly recession will impact the IT industry is to be fully assessed.
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But definitely, the IT is today a much better pack in terms of relative valuation to be considered than what it was maybe about a year ago. Therefore, though IT has taken a lot of beating and recession fear impact is quite high, it may not be that so bad after all considering the correction that we already witnessed so far.
Are you focussing more on the pharma sector now?
I think many sectors are available at reasonably better valuations today than it was a year ago. I would not choose only one sector. I would go with a diversified approach of picking in sectors. This is clearly a choosers market. There are plenty of opportunities available across the sectors and within the sectors there are even more juicy opportunities across many stocks.
Do you think the banking sector will contribute the most to earnings growth in coming years?
The banking sector seems to be poised to do well. All the potential reasons for the banking sector to do well and to outperform the border index is by and large in place. We have had multi-year challenges for the banking sector.
There has been a lot of cleaning and correction which has led to a belief that the entire financial services and the banking sector today is in a much better position than what it was. Therefore when there is a rebound of earnings, it is fair to believe that the numbers from the banking sector will be above par than the industry averages.
Do you expect the gold prices to remain under pressure given the hawkish stance by Federal Reserve?
Gold prices have cooled off a lot. What is hiding for the domestic investor on the actual real prices of gold is the way the rupee depreciated against the dollar. Though gold prices from March highs of $ 2000 per troy ounce to the recent sub $ 1700 an ounce which is a good $ 300 correction, what is hiding some of the deep correction in gold has been the rupee depreciation which for a domestic investor is a massive cushion against the gold prices.
So, I think gold will remain under pressure due to the hawkish stance of the Federal Reserve but once that changes and things normalize, gold may come back again to $ 2000 levels or maybe even go a little higher than that level.
Currently at the moment, nothing seems to be making sense because currencies have gone haywire and commodities are under stress because of the way the dollar is performing against most currencies of the world.
I think you will have to wait and watch for one or two quarters down the line and gold seems to be having a more favourable outlook purely based on the way it is priced in right now.
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