At a time when most of the stocks are down on a year-to-date (YTD) basis, Jaspreet Singh Arora, chief investment officer, Research & Ranking, sees a couple of factors which are in favour of Dalal Street. In an interaction with Business Today, Arora also shared his top themes, investment strategy and views on the available buying opportunities in the beaten-down market. Edited excerpts:
BT: Do you see any silver lining amid the ongoing uncertainties in the equity market in the form of rising inflation, heavy outflows by FIIs, geopolitical crisis and falling rupee?
Jaspreet Singh Arora: Improved corporate health, higher credit growth coupled with the government’s infrastructure focus and increasing investment appetite in new-age sectors is making India resilient. India has recorded the highest ever annual FDI inflow of $84 billion in FY 2021-22 and is amongst the top 10 FDI recipients globally. At present, India remains an attractive destination and is among the top five countries in terms of GDP. India is one of the few emerging economies with healthy fundamentals from both near and long-term outlooks and is pegged to be the fastest-growing large economy in FY23, with average GDP growth expectations of 7.4 per cent (IMF’s global CY22 GDP estimate is 3.6 per cent, China 4.4 per cent).
The government’s excise duty cuts, export duty increases, and export bans, ably supported by normal monsoon expectations have helped manage inflation to a certain extent while the falling rupee will benefit export-oriented sectors like IT, pharma, and chemicals. Our forex reserves are quite adequate to avert any currency crisis given the external shocks faced by other countries. The economy has had its set of challenges but is strongly positioned to navigate itself quite well.
BT: How do you see the further movement of the equity market in the ongoing financial year?
Jaspreet Singh Arora: Corporate earnings are expected to remain healthy despite near-term concerns of inflation and recession in the US. Nifty’s earnings per share (EPS) is expected to grow 18 per cent in FY23 and 13-15 per cent in FY24. A period of consolidation or time correction amidst volatility is anticipated in the near term before we start making bigger moves.
BT: What is your advice to investors who are in heavy losses and for those who are sitting on the sidelines?
Jaspreet Singh Arora: As much as 20 per cent of NSE 500 stocks have fallen between 10-20 per cent while an astounding 65 per cent of NSE 500 stocks have fallen between 20 per cent to 50 per cent from their 52-week high. For those with heavy losses, one should evaluate the fundamentals and growth potential of their existing portfolio stocks and we suggest exiting from stocks where the earnings will face near-term headwinds or where fundamentals are not in great shape and shifting to quality names that have demonstrated robust growth in revenue and profitability while maintaining return ratios and are likely to continue the earning growth momentum over next 1-2 years. For those sitting on the sidelines, the investment can be done over the next 3-4 months in a staggered manner.
BT: Can you throw some light on your investment strategy?
Jaspreet Singh Arora: In terms of our strategy, we have a long-term focus, which is fundamentally driven and we aim to generate alpha taking Nifty as a benchmark. We have a 10-core-rule strategy on both qualitative and quantitative measures to shortlist stocks. Our portfolios are bucketed into three categories -- structural growth with a 3-5 years view, momentum stocks with a 1-3 years view and special opportunity with a one-year view.
Though the current valuations look attractive, we normally suggest investing at least 50 per cent of your investible corpus now and the balance amount in a staggered manner over the next 3-6 months. Since October 2021, the midcaps and small caps indices have fallen by 17 per cent and 28 per cent, respectively, as compared to the 14 per cent that large caps have given up. We currently prefer midcaps and select large caps with strong fundamentals, keeping prudent asset allocation and volatility risks in mind.
BT: Which themes do you think will outperform in the next rally?
Jaspreet Singh Arora: The sectors that we are focusing on are emerging themes such as e-mobility, renewable energy, digitalization, China+1/PLI, financialisation of savings, and India’s per capita GDP tripling from the current rate of $2,000. We aim to identify companies that would best benefit from these themes playing out. The e-mobility theme would benefit select stocks in the automobile sector, the China+1 theme would benefit stocks in the pharma, specialty chemicals and steel, among others. The PLI scheme would benefit both MSMEs and larger players.
BT: What should be the right asset allocation strategy at present?
Jaspreet Singh Arora: The overall asset allocation can be best discussed with one's financial advisor. Within equities, we recommend investing at least 50 per cent now and the balance amount in a staggered manner over the next 3-6 months.
BT: Most IT stocks have eroded investors' wealth in the ongoing calendar year. Which factors have dampened sentiment and do you see any bargain buying opportunity in the sector?
Jaspreet Singh Arora: We are positive about the IT sector as demand visibility is robust for the next 1-2 years. A large brunt of the FII selling has been borne by two sectors – IT and financial services contributing 93 per cent of the sell-off. The FII sell-off within IT has been mainly driven by high valuation, sector rotation, attrition issues, and the recent recessionary concerns in the US. We sense that even if a recession happens, it is going to be mild and short-lived.
TCS Q4 result commentary indicates good visibility on the pipeline over the next few months and they have not been witnessing any budget cuts or deferments in client spending, although the clients are watchful and cautious. Thus, one can consider that so far there has been no indication of spending cuts. We believe that today, organisations understand the importance and role of technology for survival and growth unlike previous cycles wherein the technology was way more discretionary. So, the pressure is likely to continue for a while. We prefer large cap IT names versus mid-caps due to valuations.
BT: BSE Metal index has also lost over 16 per cent YTD. How do you see the sector going ahead?
Jaspreet Singh Arora: We have a neutral view of the entire metal sector. On a relative basis, we prefer aluminium and steel over other metals. We are selectively positive on aluminium in the metal sector as aluminium’s acceptance is very high in the new-age high-growth sectors such as EVs and solar energy. Globally aluminium yet remains under tight supply. The recent imposition of export duty on steel when revoked will be a booster to earnings and exports. It will also benefit domestic producers after the clampdown of production in China and with the world looking at India as an alternate supplier to China.
BT: Power and auto sectors have outpaced other major indices. Which factors are in favour of these sectors?
Jaspreet Singh Arora: As far as the auto sector is concerned, metal prices cooling off from their highs will aid to improve margins going forward. New model launches getting good responses and volume pick-up are the key reasons driving the rally in the auto sector. We prefer auto ancillaries over OEMs due to higher earnings growth. Additionally, the competitive intensity would be high for OEMs in the coming years. Hence the auto ancillaries' sector is considered to be a better bet.
We saw 2022 investments moving more towards pockets of defensive stocks and stocks that could add value. Interestingly, power utilities are one such sector. This sector may remain an outperformer amidst the near-term volatility backed by rising interest rates, geopolitical events and oil continuing to remain above $100.
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