Daily Voice | Rate cycle to peak in early 2023, banks to see greater investor interest, says Baroda BNP Paribas MF CEO Suresh Soni

Market Outlook
Suresh Soni, CEO, Baroda BNP Paribas Asset Management, said he looks for opportunities in volatility. So, when the markets go down, he invests more in equities.

Suresh Soni, CEO, Baroda BNP Paribas Asset Management, said he looks for opportunities in volatility. So, when the markets go down, he invests more in equities.

Baroda BNP Paribas Mutual Fund CEO Suresh Soni says India is past its inflation peak. Though still above its target range of 2-6 percent, he expects the Reserve Bank India to go slow on hikes and expects the rate cycle to peak early next year.

The RBI’s monetary policy committee is holding its last meeting of 2022 and will share its decisions on December 7.

With global commodity prices cooling and inflation peaking, any change in stance on rates will be a positive trigger for bond and equity markets, says Soni, who has more than 25 years of experience managing assets.

In an interview to Moneycontrol, he says the banking sector is in a sweet spot and will garner greater investor interest. Edited excerpts:

Do you think the dovish commentary by the US Federal Reserve and the RBI will be a big trigger for the market?

Our view is that we are past peak inflation in India. While inflation is still outside the RBI target range of 2-6 percent, we expect future rate hikes to be slower. Sometime early next year we expect the rate cycle to peak.

Our global economists also believe we are past peak inflation in the US and expect the US would peak early next year. Bond markets have already started discounting as long bond yields have already come down from their peak.

With global commodity prices cooling off, inflation peaking, any change in stance on rates can be a positive trigger for both bond and equity markets.

Are foreign investors betting first on the banking space than others?

The banking sector accounts for the largest part of the index and is also a play on the Indian economy. Thus, it is a very important sector which FPIs cannot ignore. There are fundamental reasons to be excited about the financial sector as well, given the fact the valuations are attractive.

The banking sector is in a sweet spot, as interest rates rise, the loan portfolio of the banks gets repriced immediately whereas deposits get repriced only on maturity. This leads to an increase in the net interest margins of a bank. Banking balance sheets are clean and the credit offtake is strong.

For the last two years, the banking sector has underperformed and valuations have become attractive. With a confluence of fundamental and relative valuations, we believe banks are well placed and naturally would garner greater investor interest.

Also read: Monetary Policy Committee meeting: the message from the bond markets

Do you think the defence space is overvalued or will the rally continue, given the geopolitical tensions?

Defence manufacturing in India is a large and structural opportunity. While the defence budget has been static as a percentage of the GDP, a large portion of capital spend was on importing equipment. Based on “Atmanirbhar” (self reliance) and “Make in India” campaigns, there is a larger chunk of defence orders flowing to domestic companies, including listed companies.

We find some very interesting opportunities and valuations have to be seen in the light of potential higher growth opportunities in coming years. This is despite the fact that there has been some run-up in certain segments of the market. Most of the defence stocks have high government holdings and we need to watch out for potential divestment/sell down.

Also read: Cooling prices give RBI space to slow interest-rate hikes

Is it time to go big on technology space?

India has a clear edge and leadership in the technology sector. There has been a correction and the technology index has underperformed the market significantly. While a slowdown in the US and Europe remains a concern, we are watching the space and would evaluate raising our position once the pictures become clearer.

What are your thoughts on auto and auto ancillary segments?

We are positive on auto and auto ancillary. There has been a pent-up demand as well as some of the supply-side issues eased. In the near term, we are also likely to see margins improving with a commodity price correction.

With the general uptick in the economy, we are likely to see freight availability improving, leading to better profitability for commercial vehicle operators.

We prefer four-wheeler and niche auto ancillary companies. Our view is that electric vehicles will disrupt the 2-wheeler market. Some of the incumbents have a presence in 2-W electric vehicles but undisputed leadership is yet to be established.

Also read: Wait for the right entry points in the stock market

The PSU banking space has run up a lot in the recent past. What lies ahead for the sector?

In the last four-five years, PSU banks were saddled with higher NPA (non-performing assets), low capital and a slowing economy due to Covid. This resulted in PSU banks getting de-rated.

As the past NPA issues are behind us, select PSU stocks are appearing attractive. Select PSU banks have invested aggressively in building technology platforms and are getting future-ready.

With the revival of credit growth, valuation comfort and return ratios improving sustainably, PSU banks should continue to do well notwithstanding the recent outperformance.

You are launching a multi-asset fund, what is your advice to investors in the current market scenario?

Baroda BNP Paribas Multi Asset fund is a well-balanced portfolio of multiple asset classes—equity, fixed income, and gold. While equity is the growth engine, fixed income generates income and gold is seen as an effective hedge against currency depreciation and geo-political risk. In the past, gold prices have gone up in times of extreme drawdowns in equity markets. As these asset classes have low/negative co-relation with each other, investors get diversified portfolioes which can perform across market cycles.

We believe Indian equity is one of the best classes for long-term wealth creation. However, equity by nature is volatile in short term and to create wealth, one needs to stay invested through market cycles.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.