Daily Voice | This CIO stays bullish on four themes, believes Indian earnings story is on a firm footing

Market Outlook

JM Financial Asset Management believes India will benefit from good growth as China + 1 and PLI benefits start helping Indian companies scale up to the next level, Satish Ramanathan, CIO – Equity, says in an interview to Moneycontrol.

He also believes the Indian earnings story is on a firm footing. “With focus on domestic demand and government spending coming through, we see the twin engines of consumption and investment pulling through the current global volatility.”

Satish Ramanathan, with a rich and varied experience of around three decades, continues to be optimistic on industrials, domestic consumption companies, financials, and the export theme. Edited excerpts:

Where do you see the equity market, given the rising interest rate regime and growing geopolitical developments?

We see Indian equity markets going through the phase of consolidation for some more time. Foreign portfolio investors (FPIs) are currently cautious as global interest rates have risen. Hence, Indian markets are currently receiving money through domestic allocations alone. The current geopolitical developments have kept energy prices volatile, and that has proven to be a challenge for both Indian markets and the economy.

At the retail pump, however, prices of fuel have remained stable for a reasonably long period of time.

The Indian economy has demonstrated its resilience over time. With its combination of a large domestic consumption story, manufacturing resurgence and service exports it remains well poised to grow.

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Indian companies have restructured their balance sheets and are able to withstand global shocks in demand and input costs, as well as rising interest rates. Hence, we believe that Indian markets will deliver superior returns after the global turbulence settles down.

IT remained the biggest loser from last Diwali. Do you expect healthy double-digit returns from the space by next Diwali, especially after the severe underperformance and recent commentaries?

The recent results from IT companies have been encouraging. Indian IT companies are currently global players and receive business from all over the world. They are hence, prone to get impacted if a particular region like Europe goes through a crisis, such as now.

They may face currency impacts and these are business risks that we need to consider. The issues facing the IT industry in terms of rising costs and attrition remain and will need to be tackled.

Our preference is for larger companies in the IT services business, as they are more diversified across geographies, verticals and have demonstrated superior cost control. In the midcap space, we prefer companies that operate in niche segments, which have higher levels of growth.

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Do you expect the US Federal Reserve to go for a couple more of interest rate hikes before taking a pause? What are the other things that the Fed can do to control inflation in case it remains elevated?

There are two things that a central bank can do to cool down the economy. These are: control the cost of money, and control the liquidity. We believe that the Federal Reserve would want to cool the economy in a slow manner so as to avoid a knee-jerk impact.

Liquidity in some segments of the market is drying up, as also demand in the home mortgage market is fast diminishing. As corporate debt spreads start increasing with diminished liquidity, we could see some pockets of volatility emerge, especially in the lower grade debt paper markets.

Hence, we believe that the US Federal Reserve has taken the easy part of interest rate hikes to control inflation, but (this) may not be adequate to control it. Inflation in the Western world has several factors contributing to it, and easy money is one part of it.

Issues such as demographics, immigration and local manufacturing are all contributing to it. For instance, with a tight immigration policy and focus on own manufacturing, the US would continue to experience tight labour markets for the foreseeable future. Will they relax immigration, or will they reduce investment – these remain to be seen.

Do you really think the earnings story is pretty solid in India?

Yes. The Indian earnings story is on a firm footing. With focus on domestic demand and government spending coming through, we see the twin engines of consumption and investment pulling through the current global volatility. We are encouraged by higher tax collections and the government’s capex program.

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Corporate health is good as companies have reduced their debt-to-equity ratio during the crisis. Debt quality is improving, as can be seen by the number of credit upgrades to downgrades. Results declared so far indicate that IT companies, and consumer companies have maintained their growth momentum. Commodity companies in steel and cement sectors have been impacted due to higher energy costs.

One of the largest contributors to Corporate India’s profits is the banking and financial sector, which has benefitted from lower credit costs. Bank results have been encouraging as benefits of a revival in credit growth, higher spreads, and lower provisioning costs have culminated in high double-digit growth.

We also believe midcap companies will continue to demonstrate superior growth as many of them operate in areas where competition is limited. Midcap companies have been continuously reducing their leverage and improving their cost structure.

Are you bullish on the auto space or are these stocks looking overvalued after a significant rally from March this year?

The auto sector has benefitted from the post-COVID pent-up demand and new model launches. India is also emerging as a large export hub for metal parts and engineering. (Also), China’s restrictive COVID control and rising labour costs will help in shifting some of the export demand to India.

There have been some instances of valuations getting ahead of fundamentals, but we remain optimistic on India’s auto demand. There is some disruption in the demand pattern as well, as electric vehicles gain ground and threaten to disrupt the incumbents. So, we are cautiously optimistic on this sector.

What are the best themes to look at now, which can generate healthy returns by next Diwali?

We continue to be optimistic on industrials (beneficiary of domestic demand and exports), domestic consumption companies (QSR, platform companies, garment companies, credit cards and financials), financials (benefitting from a recovery in credit growth and lower NPL costs) and the export theme (chemicals and light engineering).

We believe India will benefit from good growth as China + 1 and PLI benefits start helping Indian companies scale up to the next level.

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