“We like infrastructure due to its cheap valuation compared to the market, healthy order book position, and strong balance sheet,” Satish Menon, Executive Director at Geojit Financial Services, says in an interview with Moneycontrol.
Geojit is also positive on capital goods, though valuation wise it is on the high side in anticipation of long-term gains from manufacturing and industrial growth, says Menon with more than 24 years of experience in the capital markets.
He feels pharmaceuticals and information technology are in the last phase of the consolidation and are attractive for a long-term investor with an accumulation strategy over the next 1-2 years.
The recent data exceeded market expectations, indicating a strong level of domestic economic activity. Manufacturing & Services PMI was solid, indicating growth in new orders and production levels. This was validated by GST data for the month of April which is the highest-ever collection recorded so far. Bank credit growth was also at a good pace, suggesting stable consumption in the economy.
Q: Have you turned cautious on any sector especially after the ongoing corporate earnings season?
Till date, the Q4 results in totality are below expectations. The worst performer is IT, while the best is banking. Auto has also done well, but pent-up demand is slowing down.
FMCG has been marginally below par due to low demand and higher operating costs while cement is encouraging. Businesses and sectors which have global exposure are showing a weak trend. We continue to have a neutral rating on sectors like IT, Metals, Banks and FMCG.
Q: After the recent policy meeting, what do you expect from the Fed meeting in June considering the economic data points?
We expect the Fed to pause the rate hike in June and presume the neutral policy to stay for some time. We expect the tightening policy to come to an end but don’t expect an accommodative policy soon because inflation is above the comfort zone.
Global inflation is expected to fall in Q3 – Q4 2023, and we can expect some cuts in interest rates by the end of the year while a rapid downside can be expected in CY24. An alert is that if the ongoing banking crisis in the US continues it can force the Fed to cut rates quickly.
Q: Do you see a recession in the US in the second half of the current calendar year? Will it be mild or deep?
The US economy is forecasted to enter a deep slowdown starting from Q2 2023. This muted trend is expected to last for 2 to 4 quarters due to high inflation and financial tightening. The slowdown may not be harsh as the job market is expected to remain strong.
The effect of the economic slowdown may not have further negative implications on the stock market if the ongoing banking crisis in the US and Europe is controlled. The market is hopeful that inflation and interest rates will start to relax from Q3 to Q4 2023, providing some leeway to the stock market.
Q: Do you expect the market to reach a record high by the end of the first half of CY23?
Given the current positive trend of the domestic market, which is bouncing back after a long period of consolidation, there is a possibility of it touching and crossing the previous high. However, the sustenance of the level will be a challenge given global headwinds.
The US and European economies should overcome the economic slowdown, only then can we anticipate a total revamp in the domestic stock market.
Q: Do you think the banks are over-owned now?
Yes, exposure in the banking sector has increased in the last 2 years in anticipation of improvements in asset quality and credit growth. The exposure of FIIs increased from 30.5 percent in April 2022 to 34.2 percent in April 2023, and that of domestic funds from 30.3 percent in April 2022 to 32.0 percent in March 2023.
Both of which are above the broad market trend. The latest business data is positive, supporting the trend in the short term. However, it is likely that the sector’s performance can reduce during the year as the improvement in the balance sheet is factored in and the valuation has recovered above the long-term average.
We presume credit growth to slowdown in H2 2023 due to high interest rates. Deep recessionary pressure in H2 2023 in the global economy can have a cascading effect on the Indian financial sector. Uncertainty in global banks and slowdown in earnings does not support a further re-rating in valuation.
Q: Which are the preferred sectors on your radar that can generate alpha?
We like infrastructure due to its cheap valuation compared to the market, healthy order book position, and strong balance sheet. We are positive on capital goods, though valuation wise it is on the high side in anticipation of long-term gains from manufacturing and industrial growth.
We feel pharmaceuticals and information technology are in the last phase of the consolidation and are attractive for a long-term investor with an accumulation strategy over the next 1-2 years.
Chemicals are also attractive on a stock-to-stock basis. We also feel that small caps have become attractive on a broad basis as valuation has corrected below the long-term level, but calls should be based on a stock analysis basis. As sector themes, we like paper, sugar, and renewable ideas.
