Chirag Mehta is the Chief Investment Officer at Quantum AMC.
Quantum AMC Chief Investment Officer Chirag Mehta is positive about the recovery being seen in the Indian economy, which, he says, should support earnings for the next two to three years.
The revival in real estate, pick up in IT hiring, improved credit growth and robust tax collections are the factors powering this cyclical recovery, he says.
Mehta, who has 19 years of experience in the financial markets, manages four funds largely in the field of alternative investments that include a gold fund, a multi-asset fund and an equity fund of funds.
He expects the RBI to go for “a 25-35 basis point rate hike with a divided Monetary Policy Committee” this week. In an interview to Moneycontrol, Mehta says going into next year, there is a strong case for the central bank to pause and recalibrate the monetary policy. Edited excerpts:
Do you still have a bullish view on the auto space considering the consumer sentiment?
Two-wheeler prices have seen significant price hikes over the past few years due to inflation in input prices and regulatory reasons. As income level improves over time, we believe the sector volumes have the potential for a substantial revival especially as we see rural growth improving.
We are also on the cusp of the replacement cycle kicking in which should also drive increased sales. Export themes can also be a meaningful contributor to some of these companies. Valuation at this stage is also quite compelling when we compare some of these companies with their history and broader markets, which all-encompassing makes us positive on the sector.
Do you think the equity market rally which we are seeing now is sustainable for long?
We are quite positive on the cyclical recovery that we are witnessing in the Indian economy, this should support earnings for the next two to three years. Growth drivers like revival in real estate, pick-up in IT hiring, increasing credit growth and robust tax collections are factors that underlie the cyclical recovery and this makes us quite constructive on markets from a medium to longer-term perspective.
Concerns around high inflation, global interest rate hike cycle, uncertainty around war and a slowdown/recession in the developed market could continue to weigh on near-term investor sentiments but does not meaningfully alter the long-term argument until we see many of the growth levers deteriorating.
Are the market valuations justified?
If we were to look at current frontline indices’ valuation as against longer-term history, the market is trading at a marginal premium to long-term history. While certain pockets such as staples, industrials, and some durables names continue to trade at expensive valuations, there are opportunities in broader markets.
From a valuation standpoint, there are sectors like financials, consumer discretionary like autos, and technology that do offer pockets of value.
Are you comfortable with the valuations of the new-age companies, which have seen a steep correction from their issue prices?
While there has been significant correction (50-80 percent) in many of these names since listing, we continue to find valuation in many of these quite expensive. Some of these companies are still trying to figure out the path to profitability.
Given this uncertainty, investing experience in some of these names can be quite risky and volatile.
Are you still worried about inflationary pressures despite the recent cooling off?
Inflation at the headline level has started to cool off. The high inflation base of the last year and falling crude oil prices should aid this downward trend over the coming two-three quarters. As a base case, we expect the CPI (Consumer Price Index) inflation to fall toward the more comfortable level of 5 percent-5.5 percent by the middle of the next year.
However, there are upside risks to inflation from rising food prices and a general recovery in demand at the lower end. If input prices remain elevated, we should expect producers to pass on the higher cost to consumers in an improved demand environment.
Do you expect the RBI to hint at a pause in rate hikes during its policy meeting this week?
Like many other central banks around the world, the RBI has also frontloaded the monetary tightening with a steep rise in the policy interest rates and a drastic reduction in liquidity. The impact of these measures will come with a significant lag. Thus, there is a strong case for the RBI to take a pause and recalibrate the monetary policy based on incoming data.
After the last Monetary Policy Committee (MPC) meeting, two of the six MPC members openly stated their preference to pause the rate hiking cycle near the repo rate of 6 percent.
In the December meeting, we might see a 25-35 basis point rate hike with a divided MPC. But given the slowing global growth backdrop and fragility of domestic growth recovery, it would be difficult for the RBI to continue with the rate hikes much into 2023.
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