stocks to buy: ETMarkets Smart Talk: There is value in IT, FMCG, financial and agri stocks for long-term investors: Pradeep Gupta, Anand Rathi Group

Over the past two years, financials have significantly underperformed. For long-term investors, I see considerable value in the problems of variation in financial values, says Pradeep Gupta – Co-founder & Vice-President, Anand Rathi Group.

In an interview with ETMarkets, Gupta, who has over 2 decades of experience in the financial markets, said, “I like some of the private sector banks, non-bank financial companies, brokerage houses, heritage, etc. in a longer term perspective”. Edited excerpts:

RBI’s surprise rate hike knocked the bulls out of the D-Street arena. What impact could this have on earnings, markets in general as well as the currency? What is the future trajectory of hikes?
The recent rate hike by the Reserve Bank of India (RBI) is obviously aimed at controlling inflation. Although there are various channels through which an increase in the policy interest rate can dampen inflation, it inevitably reduces demand in the short term.

Consequently, the short-term impact of a rise in interest rates on growth and therefore on corporate profits is negative.

At the same time, the rise in key interest rates also increases the risk-free rate and therefore the discount rate for future benefits. These, in turn, reduce the valuation of companies.

Overall, the short-term impact of a rate hike should be negative on corporate earnings and the stock market.

However, given that raising interest rates and therefore controlling inflation are aimed at stabilizing both growth and inflation over the medium to long term, monetary tightening should have a positive impact on corporate earnings in the future. longer term, the discount rate as well as the valuation multiples of the shares.

Therefore, unless rate hikes are too tight, tighter monetary policy during a phase of high inflation should be long-term positive for the stock market and corporate earnings.

By reducing interest rate differentials with the rest of the world, rate hikes should strengthen the domestic currency. Therefore, the recent rate hike by the Reserve Bank of India is positive for the Indian Rupee.

We expect India’s medium-term inflation to range between 4.5% and 5.5%. Historically, the Reserve Bank of India aimed to keep the real repo rate between 100 and 150 basis points.

In this context, we expect the cyclical repo rate to peak around 6-6.5%. As a result, we expect the RBI to tighten the repo rate by another 200 basis points over the next 24 months.

The US Fed was not far off either and raised rates by 50 basis points. What are the potential risks for India from a Fed hike?
An aggressive cycle of rate hikes by the Federal Reserve may cause the US dollar to strengthen further and reduce the rate of global growth.

At the same time, this may result in the withdrawal of investments from riskier assets, including equities and emerging market assets.

Risks to India from a rate hike by the Federal Reserve are therefore capital outflows, including a further reduction in FII’s stake in Indian equities and the depreciation of the rupiah against the US dollar.

What is your investment style and your mantra for picking stocks?
I believe in strategic portfolio allocation where the key decision is asset allocation between competing asset classes like stocks, debt, term deposits, real estate, gold and various other assets .

Stocks are one of the most attractive asset classes for long-term investors. However, in the short term, stocks are very volatile.

Therefore, the equity allocation must relate to a longer period extending over at least three years. For most retail investors, myself included, the best way to gain exposure to stocks is through mutual funds rather than straight stocks.

It’s not because I think picking the right stocks is a difficult task, but because it’s a full-time job. Therefore, it should be left to specialized fund managers who do this job 24/7.

That said, many retail investors would also like to have direct exposure to equities. For them, my advice is to avoid tip-based investments or short-term news feeds.

Although such an investment sometimes pays high returns, it can also be very risky and therefore not worth investing on a risk-adjusted basis.

There are only three things that determine stock prices over the long term: fundamentals (both macroeconomic and corporate), stock market liquidity, and valuation.

You need to have a fair idea of ​​these over a 3-year period to invest in individual stocks.

In a rising interest rate environment, should one change one’s portfolio. What is the ideal asset allocation strategy?
The phase of the interest rate cycle certainly has some impact on the returns of different asset classes. In this sense, a cycle of rising interest rates should require some portfolio adjustments.

However, in the strategic asset allocation approach, the one I recommend, far more important considerations are investors’ return expectations, risk tolerance, cash flow situation and investment horizon. individual.

Once the portfolio is constructed based on these factors, the need to adjust the portfolio based on the economic cycle is not substantial.

It is generally perceived that in a cycle of rising interest rates, the interest rate sensitive part of the stock and bond market underperforms. However, other company-specific macros and situations decide the fate of individual securities.

The ideal framework for asset allocation continues to be the strategic approach that incorporates key individual investor considerations and keeps the portfolio largely unchanged despite short-term market volatilities, including the phases of the interest rate cycle. ‘interest.

What is your view on some of the sectors beaten over the past month – IT, real estate as well as telecommunications? Do they belong to the category of value purchases?
The recent underperformance of most of these sectors, particularly information technology and real estate, should be seen in the context of strong previous outperformance.

Compared to most earnings-based valuation multiples, the current valuation of these sectors is not extremely attractive.

Therefore, I don’t think these sectors qualify as value buying opportunities; in fact, with the possibility of near-term headwinds for global and Indian equity markets, the real estate sector could underperform in the near term.

Globally, technology companies have faced significant headwinds over the past 6 months. Some of this can also be passed on to Indian IT stocks.

While on a bottom-up basis we like some of the companies in these sectors, we can’t call these sectors value sectors at this time.

Where does value emerge in this market? Where does the smart money seem to be moving?
Over the past two years, financials have significantly underperformed. For long-term investors, I see tremendous value in the issues of financial stock fluctuation.

I like some of the private sector banks, non-bank financial companies, brokerage firms, wealth managers, etc. in a longer term perspective.

I also like Indian IT, in the future. I also expect a revival of rural demand, which can have a positive impact on some FMCG companies, two-wheelers and various agri-related sectors.

What is your opinion on the small and mid cap space? Has the broader market outperformed in recent months? Will performance be affected in a rising interest rate environment?
While mid and small caps underperformed large caps for a few years before the pandemic, these companies have outperformed since then.

From a medium-term perspective, we are positive on the outlook for these. Still, the outlook doesn’t look particularly encouraging in the near term, as investors’ risk aversion to equities continues.

Should investors reconsider investing in high leverage or growth companies? What is your point of view ?
Indian equities are attractive due to their growth prospects. I prefer growth stocks to others. Certain growth stocks such as those in the capital goods sector can also be leveraged.

We are positive on the India investment team and therefore positive on the capital goods sector. These companies can be attractive in the medium term.

In a cycle of rising interest rates, however, other types of leveraged businesses may underperform unless there is operational leverage.

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts belong to them. These do not represent the views of Economic Times)

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