Bond market: Mihir Vora explains where he finds the conviction to buy again in a booming market

“It looks like the bond markets are looking at lower inflation over the next two quarters. So if that is the position taken by RBI, we could see a big upside at the next meeting, but the end of the upsides could be a little soft then,” says Mihir VoraDirector & CIO, Maximum life insurance.

It’s been a fantastic series and we’re starting a new one on a high note as well. The sector composition has undergone a 360 degree turn. Autos are doing well, but now real estate and some of the PSU banks have been added to this pack and even metals elsewhere are staging a comeback. Where do you find the conviction to buy again, if at all?
We are still continuing with our theme of playing the domestic economy because we believe that even though the Indian economy may slow down a bit in the second half of the year, it will still be one of the fastest growing economies in the world and it will have another 5-6% GDP growth coming out of FY23.

Thus, to this extent, the pillars of growth, which are domestic consumption, private sector capex and the theme of make in India, will continue to drive the domestic economy and henceforth the markets and corporate profitability. So domestic versus global sectors continue and within domestic we talk about consumer discretionary, financials that benefit from credit growth, etc., and investments based on government and private sector spending .

Which pocket would you like to bet on right now? NBFC reported a good set of numbers, an example being the Bajaj twins.
In financials, many pockets look good as valuations in this segment are still quite reasonable compared to pre-Covid levels. Of course, the bias is in favor of private sector banks, but there are good pockets of value even in the NBFC segment.

The main driver is that we are finally seeing a significant acceleration in credit growth and from the comments of the past two quarters on private sector finance, the worst NPA issues have passed and some of the cases are also seeing the rewriting of older provisions they have taken in anticipation of some related successes.

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We should see two good quarters in terms of asset quality and credit growth is accelerating anyway. Overall, this is a good macro backdrop for private sector financials as well as NBFC.

How did you interpret the L&T figures? What are the main takeaways?
I will not be able to comment on the results of individual companies. We are quite positive about the traction we are seeing in engineering and construction as well as capital goods. Engineering construction is mainly driven by government spending and, to some extent, the good traction of commercial real estate as well as some business spending.

But it is mainly linked to public spending on infrastructure, roads, etc. When it comes to private sector investment, we see good pockets, especially in LIP-related sectors, where investment is only expected to pick up speed over the next two to three quarters.

What is the outlook for the entire FMCG industry? How did you interpret the general consumer trends?
It’s been a mixed bag in the FMCG space. I expect margin pressures to continue, but that may or may not be reflected in stock prices, as we have had a significant underperformance for the FMCG space for a long time. Over the last three or four months, despite very high commodity prices for at least the last two months, they have stabilized and started to rise.

Rural demand should do well, especially after the monsoon as we enter peak season. Although not a spectacular sector in terms of absolute returns, it will tend to be defensive and less volatile going forward.

Are you becoming more convinced about metals? The cycle has already played out once but is it time to bet on them again?
We are neutral on metals. While valuations are cheap, there is still a lot of uncertainty regarding Chinese growth. I don’t think China has announced any major stimulus measures and is also stuck in some cities. China is by far the largest consumer of most base metals and raw materials. So while valuations are cheap, we’re not too sure about pricing power and future trends.

Do you have any idea what might happen at the next monetary policy meeting? Do you expect this aggressive rate cycle to continue?
We expect initial rate hikes. In the next policy, we expect a 35 to 50 basis point hike in interest rates. What will be equally important will be the commentary the Governor will give as to his view of inflation, whether it is sticky or not.

At least as far as global bond markets are concerned, it looks like bond markets are pricing in lower inflation over the next two quarters. So if this is the position taken by RBI, we could see a big upside at the next meeting, but then the tail of the upsides could be a bit soft. This is the basic scenario we are going with.

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