Vikas Gupta, CEO & Chief Investment Strategist at OmniScience Capital
“The biggest themes which have high quality, resilient-to-recession, high-secular growth companies are the Digital Transformation and Metaverse. The Indian IT companies which are exposed to these themes are trading at a 1-year low,” Vikas V Gupta of OmniScience Capital says in an interview to Moneycontrol.
Another theme is the Amrit Kaal, the CEO & Chief Investment Strategist at OmniScience advised.
Vikas who provides a scientific approach to equity investments in Global & Indian stock markets, with nearly 20 years of experience in capital markets says the valuations are relatively better in the ancillaries as compared to the original equipment manufacturers (OEMs), but overall, one has to be careful.
Is the global recession fear fully priced in by equity markets? Also is it a major worry for the Indian economy?
A recession or a significant slowdown in the EU, UK, Japan and China in 2023 is expected by the markets and that is well-known and hence priced in. The US is being forced into a recession, or definitely a significant slowdown despite inherent strength in the economy since the Fed can only control the demand side and not the supply side.
Thus, the Fed is bringing the demand down to what is the supply available. Thus it is actively trying to kill the demand and consequently the economy in the short-term since it has no tools to enhance supply. A US slowdown and a possible recession are again clearly communicated by the Fed and discounted by the markets.
India is a shining star in all this grim outlook worldwide. If RBI is forced to hike interest rates to save the currency from depreciation there could be some slowdown in India’s growth, but it looks unlikely to go below 7 percent. The major impact of a global recession is likely to be on exports. Exports are expected to be around $ 500 billion. If global growth declines by 2 percentage points, and India’s exports by around 5 percent, it is an impact of roughly 50 to 70 bps on India’s GDP growth.
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Do you think the valuations are quite attractive in auto ancillaries over auto OEMs?
The valuations are relatively better in the ancillaries as compared to the original equipment manufacturers (OEMs), but overall, one has to be careful. One has to exercise selectivity. One cannot just jump in and buy ancillary stocks just because they are relatively cheaper compared to OEMs.
After reading Fed Chair’s commentary, do you think the hard money policy would continue into the next year as well? If yes, then will it have a major impact on global growth?
The Fed has clearly indicated that the new dot plot, to be issued post the December meeting, is likely to show a higher peak rate than earlier. It is likely that the peak rate could be 5-5.5 percent. This means a 75 bps in December followed by 50 bps in the next one and then a slower pace. This would depend significantly on the path of the PCE (Personal Consumption Expenditures) core inflation. What is likely to happen is that when the 5-year treasury yield goes higher than the core PCE inflation, the Fed will likely take a pause.
Now the issue with the Fed rate hikes is that it is not impacting the US economy as much so far but it is impacting the currencies of all the other economies. Interestingly, the developed market currencies, the so-called “hard currencies”, like the Euro, Pound and Yen have been impacted more than a “soft” currency like the INR. And currencies of weaker emerging market economies are impacted really hard.
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This is causing a larger impact on those weaker economies as compared to the strong US economy. This “collateral damage” is likely to put the world in severe slowdown or recession while the US economy comes out nearly unscathed with a slight, short-lived recession at worst.
Similarly, India is likely to emerge as a shining star with nearly 7 percent growth, which would be a significant contributor to global growth in a mostly recessionary world.
Do you think the companies that may benefit from the capex cycle are trading at high valuations?
To benefit as an investor from the capex cycle, one has to take a broader look. One should understand the whole capex ecosystem. The capital goods or equipment companies are just one segment. Even there one should look at more sophisticated valuation metrics beyond just the PE ratio.
It is likely that a lot of them have been operating way below their capacities. When the capacities are utilized fully, the RoE (return on equity) is likely to increase due to the significant operating leverage that these companies enjoy.
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Now going beyond these, one can look at companies which are suppliers to these or companies which take projects to deliver capital investments or companies which finance these. As one casts a wider eye across the full capex ecosystem one will spot numerous companies which are available at significant discounts to their intrinsic values.
For example, we have numerous companies from the railway sector in our Omni Bullet Train portfolio which are likely to benefit from the huge capex of nearly Rs 14 lakh crore by 2025 and more beyond. There are companies in the power ecosystem, including equipment manufacturers, generating companies, transmission companies, trading companies, power exchanges and financing companies, which are likely to benefit from the capex of nearly Rs 20 lakh crore by 2025 and beyond.
Then the banks, other financing companies, rating agencies, stock exchanges etc. would also benefit from the capex cycle. Beyond this is the capex happening in the defence sector.
What are your thoughts on rural inflation? Is it really a big factor to watch out?
Rural inflation is not really a demand side issue. It is a supply issue where many basic necessities are not reaching or are reaching at a higher cost. However, anecdotal evidence is that this Diwali has been good and hence it looks like the rural economy is doing well. As the food supply chain eases out the rural inflation should be not much of a concern.
What are the quality themes in this market available at reasonable valuations now?
The biggest themes which have high quality, resilient-to-recession, high-secular growth companies are the Digital Transformation and Metaverse. The Indian IT companies which are exposed to these themes are trading at a 1-year low.
In fact, except for real estate, IT has been the worst performing in terms of stock prices. However, the IT companies have been growing at mid-teens and are likely to continue doing that even if a mild recession strikes in the US.
Such companies which are exposed to multi-decadal, hyper-growth themes like the Digital Transformation and Metaverse, and have a near oligopoly in it are trading at significant discounts to their intrinsic values.
Another theme is the Amrit Kaal. This is again a multi-decadal theme which is robust given its relative independence from broader economic situation. It is driven primarily via government spending on physical and digital infrastructure projects in the initial stages.
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