Vikas Gupta, CEO & Chief Investment Strategist at OmniScience Capital
Dr Vikas Gupta of OmniScience Capital is optimistic about the next calendar year and the upcoming financial year.
In an interview to Moneycontrol, the CEO and chief investment strategist shares that the US will have a fast lowering inflation profile, 0-1 percent GDP growth and a visibility to lower Fed funds rates.
Global policies are likely in the last leg of tightening and thus it is already accounted for. In fact, markets are looking beyond that, says the ace investment strategist with nearly 20 years of experience in capital markets.
While the stock market has not fully digested the peak interest rate visibility in the first half of this fiscal, the bond markets are clearly indicating that rates would go down from the second half, he feels.
After about a 4 percent rally this year, do you expect the next year to be great for equity or will the global concerns weigh on the market?
Before answering that, let us discuss the black or grey swan of the Covid pandemic which has raised its ugly head. Because it is going to be the most important factor if it happens. Today there is a strong possibility of another round of the Covid pandemic happening because of China losing control on the situation. This was hardly considered a serious possibility until just a few days back, but has now manifested itself as very real.
Of course, the difference this time around is that nearly the full population of India is now vaccinated with two shots and a third booster dose. Thus, even new variants might not have a devastating effect. However, the risk of international travel being shutdown for quite some time is high.
Internally, countries might also be forced to go for lockdowns. The good thing is that there is experience of handling such situations now and thus governments, healthcare facilities, businesses and citizens are all better prepared for it. The fear should be much less and the motto, ‘Keep Calm and Carry On’ might be easier for people to implement.
Now, let us consider both scenarios. If there is a Covid-22 shutdown, then the global supply chains will again get disrupted. Many businesses, like restaurants, hotels, tourism businesses, malls and cinema halls might face difficulties. This looks unlikely right now since most people worldwide have either been vaccinated or have been exposed to the virus already. But if it happens, then some businesses could again face disruption for a couple of quarters.
This is likely to be accompanied with fiscal support to citizens and small businesses from governments and also monetary policy support in terms of rate reductions from the central banks. In that case, we have seen the stock market movie before. Of course, history doesn’t repeat itself, nor a rhyming of history is guaranteed but the more likely scenario is likely to be a rhyme.
Assuming that Covid-22 doesn’t result in any major shutdown or damage, meaning we are talking of the “normal” scenario, then the Fed rate hikes should likely be done by the March meeting and result in the Fed funds rate at 4.8 percent or so. Beyond that the chances of a rate hike are strong sometime in H2 2023 or H1 2024, by when inflation should be coming down significantly, barring Chinese shutdowns. But, by now, alternative sourcing is a given. So chances of inflation continuing are quite low.
We believe that except for Covid worries, the market knows all this, as seen from the US Treasury market yield curve, and the stock market should digest this once the tax-loss harvesting is done in December. We believe that the US will have a fast lowering inflation profile, 0-1 percent GDP growth and a visibility to lower Fed funds rates.
Based on this we are quite optimistic about Calendar 2023 or FY2024. Of course, we understand that this is a high probability scenario with a low probability that things could go against our view and the portfolio is positioned with companies with strong balance sheets and strong dividend yields to protect on the downside, to survive, and exposure to companies exposed to robust growth vectors, strong product portfolios and strategic positioning to capitalize on the upside, to thrive.
Do you expect rural demand to be challenging in coming months given the higher inflation?
We think most of the inflation will start receding now, except as we mentioned the Covid shutdown factor. Rural demand should be reasonably strong. With RBI, too, pausing further rate hikes in FY24, and, with high likelihood, maintaining or reducing interest rates, the rural demand should actually increase.
It also being the last year before election there are likely measures to be announced in the Budget to enhance the rural economy and boost demand there.
Considering the expected slowdown in the west, do you expect a major slowdown in the IT space? Also will that be a buying opportunity?
Here our views are quite contrary to the views of Mr. Market. Indian IT space has nearly 60 percent revenues coming from the digital transformation (DX) practice, primarily meaning cloud migration, consumer experience and digital marketing. Cloud is expected to continue to grow at 20 percent+ by the 3 largest platform providers. This would result in a growth rate of mid-teens for the Indian IT service providers in 2023 or FY24.
In any case, the longer term digital transformation, AI and Metaverse practices are expected to grow at 20 percent+ CAGR for a decade or more. Also, keep in mind that as the digital revenues grow larger and larger, the revenue growth rates of the Indian IT service providers is likely to accelerate.
These companies which are helping disrupt and transform the global economy are available at very reasonable valuations. We think the buying opportunity is staring us in the face, including in the US Big Tech. But one has to analyse all the facts for oneself; there can be no borrowed conviction.
What’s your take on the new-age stocks that are available at attractive valuations?
We think that each new age stock has to be analysed on its own merits and based on the strategy, financials, unit economics, growth investments in R&D, product development and marketing, the effectiveness or ROI of these investments and the valuations they are available at.
But given the huge drop in prices and the negative sentiments around them, it might be a good time to start evaluating these companies seriously with a deep dive into their strategy and financials.
However, we don’t think there is any hurry since their income statements are likely to continue reporting negative earnings for some time. But the next 2 quarters is what is the available time horizon for those opportunities.
However, US new age tech companies which have positive cash flows already should be looked at seriously and with more urgency.
Is the market underestimating the impact of tightening from global policies?
Global policies are likely in the last leg of tightening and thus it is already accounted for. In fact, markets are looking beyond that. While the stock market has not fully digested the peak interest rate visibility in H12023, the bond markets are clearly indicating that rates are likely to lower from H2 2023 onwards.
While no one can rule out any scenario, the probability of an optimistic scenario is stronger.
What are your thoughts on the recent surprise by the Bank of Japan in its policy?
We think that it is a good move by any central bank to communicate its policy framework clearly, but to keep some surprises from time to time to stop making Mr. Market from taking it for granted.
What happens is that as the central banks talk transparently, the markets start looking beyond and sometimes not taking the central bank seriously. For this the central banks have to give some jolts.
The new policy gives more flexibility to the Bank of Japan and also the successor of the current Governor, Mr. Kuroda.
Your wish list for the Union Budget 2023…
We would like to see more detailed elaboration of the Amrit Kaal vision with budget allocations or non-budgetary reforms and financial plans for the four prongs specified in the previous budget. We expect more allocations to specific infrastructure and logistic projects under the PM GatiShakti Initiative, more specifics on inclusive development, with a focus on rural areas, more incentives for the sunrise sectors like Clean Tech, Electric Vehicles, AI, Quantum computing, Industry 4.0, Robotics etc., and other productivity enhancement initiatives including digital programs for e-governance and progress on ONDC and other similar initiatives.
Further, we would like to see innovation in financing of investments, including encouraging municipal and state governments to float bonds and SPVs for specific infrastructure, digital projects or Clean Tech projects. We would also like to see large scale divestments of cash flow positive infrastructure projects in the form of InvITs.
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