Aditya Sood of InCred PMS
InCred PMS expects market returns to be in line with the earnings growth with limited room for the P/E multiple to expand. There is a divergence in valuation in many sectors, which could be a constructive environment for bottom-up stock picking, Aditya Sood of InCred PMS says in an interview to Moneycontrol.
After the November policy meeting, the head portfolio and fund manager at InCred PMS with over 17 years of experience in equity markets, largely spanning fund management and research, says the yield curve is inverted leading them to believe that the US Federal reserve would possibly do two rate hikes of 50bps and 25 bps and should eventually pause at a 5 percent level.
Do you expect another 75 bps interest rate hike by Federal Reserve?
There is a significant correlation between the M2 growth and the CPI, the money supply growth has tapered down sharply inflation should taper down, core inflation would be a key monitorable.
The yield curve is inverted which leads us to believe that the US Federal reserve would possibly do two rate hikes of 50bps and 25 bps and should eventually pause at a 5 percent level. The Fed funds futures are pricing a terminal rate at 5.18 percent in July 2023.
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Do you think for India, 7-8 percent inflation is not a big harm, but definitely big for other countries?
India being a net importer of oil and a current account deficit economy like most other emerging markets has been a structurally high inflation economy.
Running a fiscal deficit and current account deficit has monetary and fiscal constraints. Whereas, in most of the developed world the rate of change of inflation has surprised this along with a loose monetary policy, which has forced the central banks to change their stance and tighten rates.
We believe it is underappreciated that Indian policy makers and consumers have significant experience dealing with high inflation.
Do you believe in the coming years, India is going to play a big role in the global supply chain segment given the changing global environment?
The zero Covid policy in China has created an opportunity for India to emerge as a preferred destination in global manufacturing. India is better placed than most countries on the geopolitical stability front.
The PLI (production linked incentive) programme has incentivised large scale investments by corporates, infrastructure augmentation through the dedicated freight corridor and the NHAI corridors would improve the logistics competitiveness, all these measures have led to companies to shift the supply chain incrementally to India.
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India is also going to be a large market for most of the companies which are manufacturing in India.
Most experts are bullish on commercial and passenger vehicle segments, but avoid two-wheelers and have mixed views on tractor segments. Are you in the same camp?
The auto sector has been impacted by the BSIV to BSVI transition, the NBFC crisis, Covid impacting personal mobility and chip shortages impacting supply. We believe there is pent-up demand driven by the need to upgrade.
We believe there is a potential of volume recovery across passenger vehicles (chip shortage easing off and new launches driving replacement cycle). In the commercial vehicles cyclical recovery would be aided by strong macro and improving fleet utilisation levels in the coming years.
The recovery in 2-wheeler volumes would be gradual and see a meaningful pick-up if we see rural demand improves as farm income improves on account of an improvement in food prices.
There are margin tailwinds in the sector given meaningful correction in commodity prices steel, aluminium etc. The profitability at most OEMs is below average currently we expect normalisation ahead and valuations are reasonable valuations which should mean revert.
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Is it the best time to enter the fixed income market over the equity market? Also do you expect the Nifty to end the financial year with 10 odd percent return?
The differential between the 10-year bond yield in the US and 10-year bond yield in India is 3.3 percent which is the lowest in over a decade. Global fixed income particularly the US treasury has become an attractive asset class post the rate hikes.
Over the near term the bond yields in India could move up given the fiscal and current account deficit that India is running.
We expect market returns to be inline with the earnings growth with limited room for the P/E multiple to expand. There is a divergence in valuation in many sectors, hence we believe this is going to be a constructive environment for bottom-up stock picking.
Given the rising interest rates, should one avoid real estate space?
The demand in real estate post covid has been driven by the need to upgrade. Improving sales for the real estate sector both commercial and residential, has led to organised players gaining market share.
The impact on demand in an environment of rising interest rates, due to rising input costs and slowdown in tech hiring may not play out amid a buoyant demand scenario.
Are you super bullish on consumer discretionary space?
We have a positive stance on discretionary consumption which is driven by rising consumer discretionary spending as it gains share in total consumption, as per-capita GDP has crossed the important $ 2,000 mark.
The number of households earning more than $ 35000 has a potential to grow 5 fold over the next decade. People upgrading from the bottom of the pyramid makes us constructive on low unit consumption in India.
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