“In India, the IT sector sell-off was due to fears of a severe US recession, but it now appears that this will not occur. Accordingly, the sector has started showing signs of recovery,” Soumitra Sengupta, smallcase Manager and Founder, Lamron Investments, said in an interview to Moneycontrol.
Hence, he feels midcap IT could be one of the outperforming sectors in India this year.
On the power sector, Sengupta, who has over 20 years of experience in quantitative investing in India and the US, says the 2023 budget has laid down the roadmap for green growth and transition to clean energy. Allocations for this sector have been increased by nearly 50 percent.
Accordingly, he feels the power sector is likely to benefit from this in the coming years. Two stocks that he likes are NTPC and Tata Power.
Below are the excerpts from the interview.
Do you think the US Fed (the US central bank) will end up with a rate of 6 percent, as they are worried about elevated and sticky inflation?
In the last FOMC (Federal Open Market Committee) meeting held earlier this month, the fed funds target rate was raised to a range between 4.5 percent to 4.75 percent. This was a 25 bps (basis points) rise and marked a deceleration in the pace of the monetary policy tightening campaign from the 50 bps hike in December, and the 75 bps hike at each of its previous four meetings.
This has made the task of forecasting the Fed’s terminal rate, i.e., the peak rate of this tightening cycle, trickier. However the consensus now emerging among Fed watchers is that the final terminal rate would be around 5 to 5.25 percent. So no, the consensus opinion, for the moment, is that the Fed will stop before reaching 6 percent.
Do you see any possibility of a strong equity market rebound after Q4FY23 earnings. Do you think the Adani rout and China reopening factors are impacting market sentiment?
Stock markets do not do well in a Fed hiking cycle, which is what the current environment is. As things stand today the estimate is that the Fed will increase rates two more times, which will take us to the middle of the year. So there is some expectation that the markets may recover in the second half.
In this context, after the initial dislocation, the Adani rout will have minimal impact. China reopening does of course reduce the opportunity space for India, but is unlikely to have a severe impact on market sentiment.
Are you betting big on the power sector in the coming years?
The 2023 budget has laid down the roadmap for green growth and transition to clean energy. Allocations for this sector have been increased by nearly 50 percent. The power sector is likely to benefit from this in the coming years. Two stocks that we like are NTPC and Tata Power.
Do you think IT stocks are not factoring in any slowdown or recession in the US?
The economic data emerging from the US doesn’t indicate a very severe recession. True, the scorching pace of the Fed rate hikes had led many to believe that there would be a severe recession, but the Fed appears to have pulled off what is called a soft landing.
In India, the IT sector sell-off was due to fears of a severe US recession, but it now appears that this will not occur. Accordingly, the sector has started showing signs of recovery. While the recovery in the largecap IT stocks has been more measured, the midcap IT space has shown much more vigour. Midcap IT could be one of the outperforming sectors in India this year and we are looking at this sector very closely.
Should one stay away from real estate, given the rising interest rates?
The Indian real estate sector had witnessed a massive sell off with the onset of Covid in 2020. The sector has recovered since then. Sales volumes, both in the residential and commercial space, have witnessed a surge. However, the sector does face headwinds in the form of interest rates.
While the growth of the middle class, for whom purchasing a house is a priority, could make this sector very attractive, we don’t believe we are there yet. At this stage, we are not looking at any real estate stocks.
What is your take on consumer staples?
Consumer staples form a major part of the stock universe and on the whole we are positively inclined towards this sector. The sector has reported very healthy numbers, with sales rising at 17 percent annually over the last three years, and earnings rising at 10 percent.
While the expectations are very positive about food staples and retail, the outperformer recently has been tobacco. We are very positive on this sector and there are many names to choose from.
Do you think the FY24 GDP growth forecast of 6.4 percent has more downside risks than upside?
The forecast of 6.4 percent GDP growth in FY24 is very robust and possibly the highest of any large economy in the world. The reasons for this optimistic scenario are increase in government spending, increase in low-income jobs, and easing of supply chain bottlenecks.
But the projection does have downside risks in the form of dependence on imported energy, reliance on foreign capital, and a slowing global economy. All of these are imponderables over which India doesn’t have any control.
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