If inflation indeed has peaked out or is in the process of peaking out, where do you see interest rate sensitive sectors 12 months far out – lenders, real estate, materials and autos also?
Inflation on an incremental basis might not be that big a concern for RBI because it is already at a high level but there is the need to increase rates from here on as well. So for sure, interest rates will rise. But what would it mean? Sometimes we think that if the interest rates are rising, the interest rate sensitives like the banks will have a negative impact. It does have a negative impact in the short run because of their treasury book, but over a longer period of time, we might see a much better operating environment for a lot of the lenders, specifically on the banking side.
The valuations have come down drastically and across the board in this particular sector and so I am very positive on it. As I have said in the past also, this is one sector which seems to be like a clear cut winner from a two-to-three year perspective. Real estate stocks have got hammered quite a lot because the commodity prices have shot up quite sharply and that is the input for real estate. We have seen global demand destruction in real estate because of the inflationary pressure.
This will be a transitory phase may be of six months and after that we are again go back to the same basic fundamentals because if they are able to pass on this cost increase and if the inflation does not go up sharply from here, then real estate is going to be one of the lucrative sectors from six months from here.
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In the last couple of days, two countries have actually cut rates – China and Russia. Overnight we also saw Rishi Sunak, the Finance Minister of Britain, announcing a stimulus package. All this is actually happening when the largest central bank in the world, the US Fed is on a rate hike spree. How do you see these contrasting forces at play? Do you think that the impending slowdown may force the Fed’s hand on the rate hike front?
Yes. This is where the new economies or the new economy policies are working. We cannot see a recessionary trend for a very long duration, either the monetary or the fiscal or both in tandem action starts to happen and that is what we are seeing currently also.
Whenever there is destruction of demand, we see a lot of action on that front. So for the US also, I would not say that in the near term they are going to slow down because inflation is moving up quite sharply and they might do it for a period of time. But what we see is that if there is impending inflation anywhere, I would be surprised if the monetary authorities are not forced to take actions which are conducive for the economy rather than go against the demand. So I think that would be a trend across the world.
What kind of earnings growth have you seen in the universe of stocks at your AMC?
Across-the-board, there has been a clear trend that every sector has seen some bit of margin pressure. This will be a trend maybe for a quarter or more and that is where the growth expectations for the next year may need a little bit of trimming down.
For us, in this season, on a blended basis, we have seen more downgrades and upgrades across the board. A bigger surprise has come from the IT sector. Just before the result season I had said that the sector to watch out for is IT given the valuations and the expectations from the market. The bigger surprise has come from that sector itself where the margin pressures have been much sharper.
Which are your biggest overweights right now? Looking at the overall environment and valuation versus earnings, which is your sector overweight for the next 12 to 24 months?
The two bigger overweights for us are auto and banks and the simple reason for banks I have already explained and autos have gone through trouble times. Hopefully the supply chain pressure would come off and we have already seen the auto companies taking a sharp increase in their prices and also the government taking action to cool down the commodity prices as well. All combined, it is going to be a good time for the auto sector as well. These are our bigger overweights.
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