Arun Chulani of First Water Capital Fund
First Water Capital Fund co-founder Arun Chulani believes inflation will continue to make headlines through the rest of the financial year. “It’s a game of wait and see on what happens in the geo-political world,” he says in an interview to Moneycontrol.
Seasoned in finances for over 20 years, Chulani prefers to look at the long term and believes that the Indian growth story will continue despite the near-term headwinds.
Considering the rising expectations for strong private capex cycle in the near term, he feels that private-sector banks are in a good space to benefit. But he would prefer to look for beneficiaries beyond the financial ambit.
What are the negative factors already priced in by equity markets?
The thing about the stock market is that just when you think that it is efficiently valued, it comes and gives you a kick. The markets and the world are just too dynamic to suggest that news gets priced in as though it’s a mathematical equation.
Volatility will always be there. My preference is to have a longer-term view when dealing with the markets.
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Given the rising optimism, do you expect 15 percent returns by market in the next one year?
One year is too short a timeframe to consider. Anyone with a bullish view on India should be looking at what can be achieved over the next 5 to 10 years. The market rarely moves in a linear fashion. While historically, the Nifty returns can broadly be seen as 15 percent, anyone looking at the graph will note that the market doesn’t walk from point to point – it dances wildly.
Do you expect the dollar strength to continue in the rest of the financial year? What’s the impact do you see on Asian markets?
With the Fed on a warpath with inflation, the US economy remaining relatively resilient, and the continued geo-political instability, there is a case that the US dollar may continue to firm up. However, a rising dollar is generally not good news for emerging markets (EM).
A number of EM countries and companies have issued US-denominated debt in recent years when the rates were lower. With rising rates and weaker currencies, there is an increased chance that this debt will be harder to service and will lead to a higher probability of defaults.
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Weaker currencies might also lead to imported inflation. This is not a great thing on top of all the other pressures and this is why many Central Banks are intervening in order to strengthen their currencies.
The Fed is unlikely to soften its stance till it sees some evidence of softening, which could well happen should there be good news in the geopolitical arena and as supply catches up.
Considering the rising expectations for strong private capex cycle in the near future, do you think one should start betting on private banking stocks?
The capex cycle seems to be in ascendency given the impetus around infra, expansion plans and PLI (production linked incentive) schemes and this in turn will increase the requirement for loans.
Private-sector banks are in a good space to benefit from the increase in Capex but given that I am a value orientated with a focus on hard assets, I would prefer to look for other beneficiaries rather than just the financials.
What are the sectors that can be benefitted by the weakening rupee against the dollar?
There are many industries that benefit from a weaker INR – those that are export and who derive revenues from overseas, like in the tech and pharma space along with the multinationals who derive their income from their operations which sit outside India.
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But again, how much of this is already priced into those sectors needs further digging as well as the fact that simply looking at a sliding rupee is just one factor when looking at a company’s fundamentals.
Is it the right time to start adding positions in IT stocks?
The cloud of recession, lack of revenue visibility plus reduced margins due to the increased labour costs caused by employment attrition and wage inflation has not been great for the IT pack. This in turn has led to a fall in their share prices.
Of course, they are cheaper than before – but my preference is on hard assets and low-valuation stocks – I think that with high PE-rated stocks, the market has a way of making you think that a sector is a good buy when share prices fall, only for them to fall further.
Just look at what is happening in the US to marquee tech names like Facebook and Snap. I am sure there are many people who thought that the bad news had been priced in, only to find out the hard way that nope – there is more to come.
With low multiple and hard asset stocks, this bloating and de-bloating of the share price can happen, but I don’t think it can happen to the same extent, especially if they are cash-flow generating.
Are you still worried about inflation for the rest of the financial year?
I believe inflation will continue to make headlines in the rest of the financial year. Unfortunately, much of the dislocation is not in the general people’s hands and it’s a game of wait and see on what happens in the geo-political world. Plus, China has yet to fully open up – which should create a surge in demand. However, I am hopeful that things will settle down overall, but in time.
That is why I prefer to look at the long term and believe that the Indian growth story will continue despite the near-term headwinds.
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