Vikas Gupta of OmniScience Capital
Both the inflation and the interest rates are nearing a peak in India a year ahead of the general elections with efforts of the government to showcase visible progress on the ground to close out its last year of two terms with a bang, Vikas V Gupta, CEO and Chief Investment Strategist of OmniScience Capital, says in an interview to Moneycontrol.
The US elections are also coming up in 2024. “The clouds of recession are now receding and chances of a positive GDP in 2023 in the US and 7 percent-plus in India look quite high. With all the firings in the US, the earnings are also likely to come out higher,” he says.
All this is likely to result in positive sentiment, he feels. Hence, by the second half, we believe that the chances are very high that the markets will start creating new highs, says the ace finance expert backed by nearly 20 years of experience in capital markets. Excerpts from the interview:
Given the hawkish tone of Fed officials, do you think the terminal rate forecast is likely to get further push towards 5.75-6 percent? When can be the possible last rate hike by the Fed and what is the worrying factor for the Fed?
Despite a seemingly higher January CPI data, it is unlikely that inflation remains high in future. It has consistently been going down from July. Fed has to sound hawkish so that the interest rates in the market stay higher for longer. Their goal with this hawkish talk is to reduce the chances of a fall in the interest rates for companies and consumers. Because if that happens before the Fed has achieved the goal of killing inflation then it will become more difficult to kill inflation.
The hawkish tone is their way of reducing the chances of that happening in anticipation. What is actually likely to happen is that the inflation data remains benign and continues downward. The Fed is meeting in late March and is likely to maintain the hawkish tone and a 25 bps hike.
By the next Fed meeting in May, the CPI, or rather Core PCE, which the Fed prefers should be such that the Fed is able to just talk hawkish and not actually raise. Of course, this is our opinion based on the fact that supply chains have cleared up for long, the ports are decongested, there is ample inventory on the shelves and the CPI is consistently downward from July onwards and PCE from September onwards. Thus, there is a view that the January data is an anomaly due to improper seasonal adjustment. In our opinion the Fed should stop at a 25 bps or maximum 50 bps rate hike.
Back to India, do you expect the last interest rate hike by the RBI in March?
Yes. We think for India, the inflation should not be a worrying factor and March should be the last one. In fact, with commodity and oil prices going down, and production going up, Indian inflation should be quite in control for the RBI to stop after March. There is also a golden swan possibility of the Ukraine-Russia war reaching some kind of a stability and thus further reducing the pressure on commodity inflation.
Also, being an election year and the focus of the government on delivering large infrastructure milestones, the focus is the RBI mandate is more tilted towards growth.
Do you think there was a broad-based weakness in the corporate earnings season gone by?
While the earnings growth slowed down, keep in mind that commodities fall was also a factor in that. In fact, IT, BFSI and auto seemed to do quite well. FMCG and consumer durables struggled but then they also raised prices at the same time. This would naturally affect the volumes. With commodity prices going down, there is a chance to reduce prices and drive volume growth in future while maintaining margins and RoE (return on equity).
Do you see any possibility of a weakening global situation in the rest of the calendar year?
It is always possible, but seems less likely to us. Inflation which was the bugbear for most of 2022 and even now, it looks on the downward trend worldwide. Also, despite all the global worries about macro-economic data and geo-political issues, including the Ukraine-Russia war, China-Taiwan threats of war, the US-China cold war, and Europe getting into an energy crisis in winter, the world has done quite well in terms of not slipping into a recession.
Having supply chains smoothened, and the outlook being lower inflation and interest rates and the likelihood of a slowdown in GDP but not a recession, it looks like most of the expected crises have subsided and are unlikely to happen this year. Rather, the flipside of the Russia-Ukraine war reaching some kind of an agreement are higher.
Do you really believe the monsoon will play a great role in rural recovery?
Monsoon will be one of the fundamental aspects for a rural recovery. However, an election year should also bode well for a rural recovery. Consider the government’s Amrit Kaal programs based on the Saptarishi strategy, and look at inclusive development and infrastructure and investment. Both of these are focused on growth through development and investing; a lot of this will impact rural incomes.
Reaching the last mile, unleashing potential and youth power are likely to have impact on young people from the lower income strata; this is likely to increase income, employability and employment of the poorer, rural youth. A lot of government schemes are also likely to put money in the pockets of farmers and other rural constituencies.
Do you think the rally in IT stocks seems to be pricing in the expected clear earnings growth outlook?
The drop in IT stocks in 2022 was an overreaction based on the focus on a US recession in 2022 and 2023. This was supposed to result in a slowdown in sales and earnings for IT companies. However, the reality remains that the chances of a US recession are significantly reduced and the project pipeline is robust.
Earnings are likely to remain high given that the extraordinary salary hikes of last year are also a thing of the past with more rationalization in the future. Considering all this and that the long-term projects on digital transformation and cloud migration are on a rise, Metaverse has started emerging strongly, 5G is on a growth path, and artificial intelligence has gotten a huge boost recently with ChatGPT marking an inflection point, the future for IT companies is highly underestimated by the investment community.
We think that the currently undervalued situation in Indian and US Technology sector stocks is an anomaly and gives a rare chance to take exposure to the AI revolution which is just at the cusp of explosive impact and likely to disrupt all areas of the economy in the coming 2 decades.
Will the market hit record highs in the second half of this calendar year and what could be possible positive triggers?
As I said earlier, the inflation and interest rates are nearing a peak, India is in an election year with efforts of the Government to demonstrate visible progress on the ground to close out its last year of two terms with a bang. Further, the US elections are also coming up in 2024. The clouds of recession are now receding and chances of a positive GDP in 2023 in the US and 7 percent+ in India look quite high.
With all the firings in the US, the earnings are also likely to come out higher. All this is likely to result in positive sentiment. A small up move of a 5 percent from here will result in an all-time-high for the markets. So the chances of the markets reaching an all time high is high even in the near term. By the second half we believe that the chances are very high that the markets will start creating new highs.
Our view is that investors should focus on adding companies exposed to unique, below-the-radar growth vectors, strong balance sheets to capitalize on the growth vectors and which are yet-to-be identified by Mr. Market. Currently, there are lots of such growth vectors in Mr. Market’s Blindspot. The focus should be on that and not worrying too much about the near term market action.
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