July was nothing short of a dream month with double-digit gains for global markets and an almost 9% gain for Indian benchmarks. Are the bulls back and, more importantly, are they here to stay?
It is too early to conclude as we are not yet off the hook on earnings downgrades and potential cash outflows as a result of US QT and rate hikes. Two things work in favor of India or Asian emerging markets in general. First, we had the statement from the Fed, where despite a 75 basis point hike, there was hope at this point of some spike in rate hikes towards the end of this year. Fed chief Powell also used the phrase soft landing a few times in his speech.
The second factor, and this is more relevant to India and fuel importers, is that we have seen fuel prices stabilize around $100-$104 a barrel. Thus, concerns about expanding current account and trade deficit and hence additional pressure on the rupiah have eased to some extent. As I repeated earlier in my discussions, we are not clearly off the hook. So this strong rally that we have seen, at least in the short term, potentially offers profit opportunities for investors.
Why is there a change of heart? Worries about valuations, inflation, high commodity prices, rising interest rates were there in June and are there in July. But has the market somehow managed to scale the wall of worry?
I don’t know if that’s a conclusion we can still come to because this climbing of the short-term wall of worry has indeed happened, but once we have more data points regarding the commentary from the US Fed and also some of the other data points like inflation and employment are there, so this narrative of a potential recession towards the end of this year or the beginning of next year may at gain ground again.
It would be too early to conclude that the markets have scaled the wall of worry. In the short term, over the last month or a few weeks, it might be yes, but if we look at the rest of the year over the next two quarters or so, we still have to hold our horses to get to this conclusion. concerned.
“ Back to recommendation stories
As the dust begins to settle, we have a revenue season ahead of us and in this revenue season, IT has been beaten, but look at all the IT companies and the revenue growth they are talking about. Banks have historically low NPAs. Credit drawdowns and disbursements are also on the mend and on the rise. What sectors are you looking at?
You rightly pointed out a particular aspect of this earnings season. In fact, over the next one or two months, watching earnings season across Asia would be the most critical data point for investors to focus on. In the case of India, we have seen major IT companies and frontline banks reporting results and it has been mixed. So in the case of IT companies, we’ve seen strong order intake leading to strong revenue growth, but obviously a negative impact on margins due to the outsourcing of development work that IT companies are now forced to do.
Investors should therefore be cautious. It is difficult at present to establish any sort of common thread between the sectors or to paint a general picture specific to a sector. Within sectors, investors should look for high-quality, cash-generating companies where concerns are largely behind us.
For banks, we’ve seen that across the private sector universe, concerns about non-performing loans are largely behind us, asset quality is improving, and even overall loan growth is around 13% at 14 %. It’s grown tremendously and it’s a universe we’re clearly focused on.
We are a little more selective on IT where we appreciate certain frontline companies that are able to reinvent themselves and therefore cushion the negative impact on their margins.
These are some of the pockets in India that we are focusing on now. Fortunately, the Indian market is wide and deep and therefore offers many investment pockets for institutional investors.
What about energy values? How to approach this? Are you looking for conglomerates? Are you looking for pure games?
Until recently we were quite positive on the energy universe, but over the last month or so we have reduced our exposure to the energy universe and eliminated some of the pure play. We still have conglomerates in our Asian model portfolio. Conglomerate energy exposures in India tend to benefit not only from energy prices or refining margins, but also from industry concentration in telecommunications, as you would appreciate. we continue to maintain exposure to conglomerates.
Where are you finding an opportunity right now? After that odd 8.5-9% market rally in July alone, are you buying anything new?
The type of exhibits I talked about earlier, which are basically private banks, automobiles, and certain pockets of energy in terms of telecommunications and exploration and refining, would really sum that up. I forget to mention IT services, the leading IT services companies on the front line. We are overweight India and have been over the past seven to eight months.
He was very helpful to us. India is one of the best performers this year among the major markets, but when it comes to adding new Indian exposure, we might be holding back for now after this strong rally.
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