V Srivatsa, Executive Vice President & Fund Manager at UTI AMC
“The big challenge is the high-interest rates and high level of interest in the fixed income, which would cap the valuations of equity markets and also increase the cost of equity for the equity markets,” V Srivatsa, Executive VP & Fund Manager – Equity at UTI AMC says in an interview to Moneycontrol.
Srivatsa with over 18 years of experience in equity research and fund management believes the banking sector is on strong tailwinds driven by higher net interest margins, strong credit growth and cyclical low credit costs.
The valuations are fair and in line with long-term averages, in the banking sector, while the valuations of the IT sector are in their comfort zone now given the sharp correction in the last year, he says.
Do you see quite a lot of volatility globally, including in India in the next financial year? What are the key challenges for the equity markets in the next financial year?
The global markets are in a fluid state given the expectations of a rate hike in the US, which will determine the flow of money and also the full impact of higher interest rates on global demand that is still not factored in global valuations. An increase in global volatility will impact the Indian markets as we are largely integrated with the global markets.
Our relative valuation is higher than peers in emerging markets though it has come down in the last few months. The big challenge is the high-interest rates and high level of interest in the fixed income, which would cap the valuations of equity markets and also increase the cost of equity for the equity markets. The markets have to wait for a pause of rate hikes in the global markets which would be the key trigger to watch out for.
Do you think the interest rate cut possibility is only in 2024 in the US as well as India?
The inflation is sticky in the US led by a high level of service inflation, which is not showing any signs of abating. While in India, there are signs of inflation moderating as we are not that impacted by services, we need to keep watch on food inflation, which can spike up on account of risks in monsoon.
However, India would need to follow the US and may not be in a position to unilaterally reduce the rates when the US and other developed markets are increasing rates.
Will India be a big beneficiary of the geopolitical situation?
India would be beneficial in some ways as investors would want to invest in politically stable markets and Indian markets are experiencing the benefits of this trend, however, it is also observed that protracted geopolitical tensions also lead to risk-off sentiments, which is not positive for global equities, especially for emerging market equities.
Do you expect more correction to take place in auto space in the coming months?
We remain positive on auto from a medium-term perspective. This sector has also borne the impact of regulatory costs push and raw material costs push, which has impacted the demand and led to lower margins.
We see scope for volume surprises and margin surprises and the valuations are also below long-term averages which makes the sector attractive.
Is it the time to pick banking stocks, especially after the recent correction from record highs?
The banking sector is on strong tailwinds driven by higher net interest margins, strong credit growth and cyclical low credit costs. We expect the same momentum to continue next year. However, we do believe that the NIM would start tapering off as the banks need to increase the costs of deposits and there could be a case of slower credit growth in the coming year. The valuations are fair and in line with long-term averages.
What is your call on the IT space, which has been quite volatile for more than 6-7 months now?
The valuations of the IT sector are in their comfort zone now given the sharp correction in the last year. While the sector may witness challenges as demand weakens in the developed markets, the sector has been very resilient in the last decade and managed to grow in spite of weak demand in the last decade.
There are also levers of cost management which will improve the margins going ahead. The growth implied in the valuations is in line with or below the long-term averages and we believe that the sector should grow in line with or better than expectations embedded in market prices.
Do you think the inflation may remain sticky for another one-and-half-year? Do you see any change in RBI’s stance in the second half of 2023?
In the Indian economy, inflation may wean off given the fall in commodity prices and less stickiness on services inflation. RBI’s stance would largely depend on the way central banks react to rates as given the huge interlinkages we cannot adopt a different route compared to global central banks.
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