Do you think we are in the middle of a bear phase in the market or is it just a correction in the bull run that began after March 2020? How much pain do you see ahead?
Globally, equity markets have gone through a sharp correction over the past six months and India is no different. Overall, the Indian economy will still continue to grow strongly over the next few years and hence, the markets should reflect the strength of the economy in the medium to longer term. It is difficult to ascertain currently how long this corrective phase will last as there are a number of uncertainties in the global economic environment – inflation being the biggest concern. However, the markets have become much more attractive after this correction and hence that much more attractive for long term investors.
What are the do’s and don’ts for investors in a declining market?
Equity investors have to take a medium to long term view. Market cycles are difficult to predict in the short term, however, equities in India have proved to be one of the best asset classes for investors in the long term. In a declining market, it is important for investors to manage their risks and ensure that they have a clearly laid out asset allocation strategy.
Which sectors are you most pessimistic about?
Indian markets, like many other markets in the world, are undergoing a change in structure. We expect that the leadership of the market might shift going forward. Everything goes through a cycle and we believe that there is a possibility that this cyclical shift will lead to change in leadership with very different segments of the market performing better in the future as compared to the past.
We have seen energy stocks outperforming in the last few months. Can you help us understand the triggers in this pocket?
Globally energy stocks have done well as energy prices have soared. The dynamics in India are different as the majority of the energy sector is government owned. Hence, the global energy price surge cannot be directly extrapolated in the Indian context.
A lot of stocks like and which were so far shunned for their poor ESG rankings are now delivering great returns. What’s behind this fancy for anti-ESG stocks?
ESG as a concept is here to stay. However, the interpretation of ESG in India will have to be contextualized by India’s own growth imperative, where India is in its developmental cycle. The global norms of ESG cannot be directly applied to India as we are still in the early stages of our developmental cycle. You cannot apply the same yardstick of ESG, especially the environmental part, when an economy is at USD 2,200 per capita that you apply to an economy which is at USD 50,000 per capita. Some of the names you mentioned have very strong cash flows and high visibility for these cash flows, reinforcing our thesis of change in leadership in the market.
Within the IT basket, where do you find value?
We believe that many of the IT firms, especially specialized IT firms, are doing very good differentiated work. These companies will continue to deliver strong growth and therefore return to shareholders if they are attractively valued. Some of the large and mid-cap IT companies have corrected to more reasonable levels of valuations now.
If there is a recession in the US, what impact do you think it may have on the earnings of Indian IT services?
The US is the largest market for a majority of IT firms. Any recession in the US will have a direct impact on many of the larger IT firms. However, some niche companies will be less impacted. The way we look at IT services, there are always some new areas of spend that emerge over the years. In earlier cycles, it was BPO, Application Development, Infrastructure Management Services, etc with Digital being the latest area of spend. It is difficult to predict what will be the next growth driver in IT but technology is constantly evolving. So it is quite possible that after a few quarters of muted growth due to recession, things may pick up again.
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