“Probability of rate cuts before March 2024 is not our base case assumption as developed market central banks are unlikely to change their stance till they are confident of inflation coming back to their mandated targets,” Gaurav Doshi, Senior EVP - Customized Portfolios at 360 ONE Plus, says in an interview to Moneycontrol.
He further says RBI is unlikely to deviate from its global counterparts - even if inflation behaves more favourably in India - as softening its stance domestically could potentially have an impact on the INR movement.
With more than 20 years of experience in portfolio management and fund management, Gaurav believes large and larger mid-caps IT companies are better positioned at current levels and any further volatility in this segment could warrant increasing allocation as the risk to reward could turn attractive.
Have you seen any surprising factor in the quarterly earnings season that ended last week?
A key positive in Q3FY23 results was the sustained momentum in companies' revenues, which were better than broad market expectations. Topline growth for the companies was largely pricing-driven except for a few segments, which saw both pricing and volume growth. This growth did not fully materialise in earnings due to margin pressures for many companies.
Large sectors such as banks, automobiles, IT, and select industrials reported numbers with healthy revenues and stable operating margins. Except for these segments, revenue growth was good but earnings were muted to negative on a year-on-year (YoY) basis due to operating margin pressure. Cyclicals/commodities, which saw strong earnings in the base numbers are witnessing contraction missing the consensus expectations.
Companies that reported strong earnings saw a marginal price change with valuation multiples declining while companies that missed earnings/outlook challenges saw price adjustment faster, leading to multiple changes without significant change to forward earnings expectations.
The biggest gainer in the current financial year so far is PSU banks. Do you think the momentum to continue in the coming financial year too?
PSU banks (~60 percent of advances market share) saw broad-based re-rating in price to book multiples as stressed asset moderation and lower provisioning led to strong earnings, leading to recovery in return on assets/equity. A shift from balance sheet clean-up/consolidation towards credit acceleration supported this re-rating.
PSU banks, given their dominant market share, will be beneficiaries of the pick-up in overall demand for credit and structural improvement in asset quality. Most banks' credit accelerations are in the mid-phase of the cycle and are major beneficiaries of the capex cycle given reasonable exposure to corporates and SMEs.
Strong advances in growth trends, industry-level deposit growth, healthy credit deposit ratio and high provisioning coverage and further moderation in stressed assets provided scope for upside to the stocks. However, incremental gains could be bank-specific given the higher competition and bank positioning /exposure.
Do you see any fresh positive triggers for the equity market in rest of the calendar year or do we have more challenges than positives in the same period?
Corporate trends remain robust with several high-frequency indicators on the economy front getting back to pre-Covid levels and consensus earnings expectations in the coming quarters are seen to report healthy earnings growth post-earnings recovery phase.
While earnings remain above trend, we could witness high dispersion among sectors/stocks for the broader market. This is reflected in the earnings results in the last 2-3 quarters.
Multiple compression and growth expectations are seeing adjustments amidst this volatility, which provides an opportunity to allocate capital with a medium to long-term view.
Portfolios, which remain anchored towards buying strong business fundamentals with reasonable growth and valuations could provide a favourable risk to reward in the medium–long term.
Do you see any sign of beginning of a bullish phase in IT space in next financial year (FY24)?
In the IT space long-term drivers remain unchanged, and its outlook is better compared to the prior decade. Elements of macro volatility are resulting in lower expectations as far as earnings are concerned and on valuations. Much of the decline in IT stocks were driven by PE multiple declines, which were trading at upwards of 30-40 percent premium to long-term averages.
At current levels, stocks are trading closer to long-term averages with select large/select mid-caps at marginal premium to 10-year averages, however, growth expectations are low or moderate. So far in 9MFY23, IT businesses have shown strong resilience and continued top-line/earnings trajectory. Risk to reward is neutral to favourable at current levels given the medium-term triggers intact.
Large and larger mid-caps IT companies are better positioned at current levels and any further volatility in this segment could warrant increasing allocation as the risk to reward could turn attractive.
Do you think the interest rate cut cycle to resume towards the end of next financial year (FY24), especially ahead of the general elections in 2024?
The probability of rate cuts before March 2024 is not our base case assumption as developed market central banks are unlikely to change their stance till they are confident of inflation coming back to their mandated targets. Central bankers will be wary of any pre-mature exit as it will dampen their credibility.
RBI is unlikely to deviate from its global counterparts - even if inflation behaves more favourably in India - as softening its stance domestically could potentially have an impact on the INR movement. Having said that, the risk to this view is a very sharp deceleration in economic activity/strong recession trend in developed countries, which in turn could impact global growth in general and India's growth in particular.