“The medium-term outlook for India remains relatively better. The structural shifts in India’s economy have started yielding results,” Arun Malhotra of CapGrow Capital Advisors says in an interview to Moneycontrol.
The manufacturing sector, driven by PLI (production-linked incentive) schemes and China + 1 factor, has pushed industrial growth, leading to higher capex and kick-start of the private sector investment cycle, the founding partner & portfolio manager says.
Malhotra, who has more than 28 years of experience in the Indian capital markets, believes the overall banking sector is set to outperform for the rest of FY2023, as the banking system’s health continues to be at its best in decades.
Most of the global investment experts have an ‘overweight’ on banks. What are your thoughts and stance on the sector?
In the last decade banking system in India, especially PSU banks, was plagued with NPA (non-performing asset) issues, lower credit growth, and high credit costs. There has been a revival in economic activity post-Covid, rising discretionary spending, and a low-base effect.
The overall banking sector is set to outperform for the rest of FY2023 as the banking system’s health continues to be at its best in decades. The key financial metrics like NPA are likely to continue to improve in the rest of FY2023, backed by strengthened balance sheets and an improving credit demand outlook, especially for working capital.
The share of financial services in FPIs’ equity portfolio reached 32.28 percent as of November 15, 2022, which is the highest in the last 18 months. Financial services are the highest weighted sector for the FPIs. We continue to be positive on a couple of private sector banks and selective PSU banks.
Are you cautiously optimistic on the IT sector?
The IT industry worldwide is struggling with inflationary headwinds; the Indian IT sector has been resilient to economic conditions. Revenue market share for Indian IT companies increased in Q2FY2023, which is a seasonally strong quarter, to 3 percent of the global market share. Most IT companies have come with decent results in Q2FY2023.
Indian IT companies, which count the US and Europe as their biggest markets, could be impacted by the anticipated weaker growth in those markets. The higher US interest rates will kill economic growth that will get fully reflected in the economic data with a lag of 6-9 months.
The slowdown in the US economy will force the Fed to cool down from its aggressive stance and reduce the pace of rate hikes as further tightening may also have repercussions on the financial stability and the financial system. IT services are an enabler for businesses and may get impacted little. We continue to be cautiously optimistic about the sector.
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Are you taking positions in the laggards of this year?
There are certain companies that continued with their earnings growth. However, their stock prices corrected or were flat and their performance was either ignored and markets did not take note of the same.
We will like to pursue such laggards in case there is a fundamental shift backed by credible management and earnings growth. We also look for stronger balance sheets that can help companies allocate capital towards growth and use surplus cash for buybacks.
Will 2023 be a much better year for Indian equities, compared to 2022?
The medium-term outlook for India remains relatively better. The structural shifts in India’s economy have started yielding results. The manufacturing sector, driven by PLI (production-linked incentive) schemes and China + 1 factor, has pushed industrial growth, leading to higher capex and the kick-start of the private sector investment cycle.
The near-term monetary and fiscal policy will be focused on reducing twin deficits and maintaining external-internal balances while at the same time keeping the momentum on public infrastructure spreading and ensuring and facilitating global trade.
Do you still think the geopolitical situation can play spoilsport for the improving equity market sentiment in the coming months?
After so many years of laxity in economic discipline, we find a lot of macro variables at play. Fear of the Fed continuing with the aggressive stance and the Russia-Ukraine war continuing to cause collateral damage in the global markets. The Europe energy crisis has killed the local economy and the European Union is witnessing unprecedented inflation levels touching double digits.
Further worsening of the above events and new unexpected crisis leading to again rally in commodity and oil prices could play a spoilsport and could derail the sentiments.
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Is there any possibility of a major shift in money flow from India to China if China reopens the economy?
The world has been looking for an alternative to China. The Indian government and state governments are welcoming businesses and investors to come and invest. India is at the cusp of the re-emergence of the growth cycle, which is possibly visible in the kind of non-food credit growth.
Additionally, the Chinese markets have corrected and there are segments of attractive valuation. Hence, money flow from India to China won’t be much in the near future.
What are your thoughts on the Indian macro set-up as we go into next year?
The total economic decoupling of any country never happens in the medium to longer term. More so, when the country’s GDP is expanding at a fast pace like India, its dependence on global economic conditions for its growth is higher. The world is becoming more integrated economically while disintegrating politically. The slowdown in global trade and demand, the disruptions, and the risks of higher inflation hurting demand and economic growth will sooner or later have an impact on India’s growth trajectory. However, the local domestic economy is doing reasonably well and the growth this time will be led by manufacturing, driven by PLI and Make in India initiatives of the government.
