‘Disappointment in corporate earnings is likely’

As markets grapple with domestic and global headwinds, ANAND SHAH, head-pms and AIF Investments at ICICI Prudential AMC, tells Puneet Wadhwa in an interview that the market is pricing in a rate hike not only in June, but up to December. Edited excerpts:

Do you think the markets can now see a time-wise correction, after the sharp price correction?

Sectors with strong global linkages, like information technology (IT), have already seen some corrections. To some extent metals, too, have corrected after the recent move in terms of export duty cuts. Similarly, several foreign institutional investor (Fii)owned sectors have also seen a sizable correction. Going forward, Indiaoriented companies may come under pressure due to the slowdown in consumption owing to pressure from rising costs of both fuel and food. So, some disappointment in corporate earnings is likely. However, prices in these pockets are yet to reflect the impact of a domestic slowdown, which is likely to play out over the next few quarters.

EARLY SIGNS OF A SLOWDOWN ARE ALREADY VISIBLE – IN BOTH INDIAN AND GLOBAL MARKETS. SO, THE MARKET IS PRICING IN MUCH MORE THAN A RATE HIKE – NOT ONLY IN JUNE BUT UP TO DECEMBER"

Do you think there can be another round of selling once the RBI and the US Fed hike rates again?

There will be a series of rate hikes but the pace and quantum will depend on how the economy in the US and the rest of the world behave. Early signs of a slowdown are already visible – in both Indian and global markets. So, the market is pricing in much more than a rate hike – not only in June but up to December. This is already reflected in bonds and to an extent in the equity market. Now, if the economy slows down significantly, particularly in the US, a lot of these rate hikes may not happen, or they could get pushed back further into 2023-24 (FY24). If that is the case, both equity and bond markets shall benefit in the short term. So, a lot depends on how consumption will be impacted after rate hikes.

Your recent note sounds bullish on manufacturing as a theme. What is driving your conviction?

The current geopolitical turmoil has accelerated the push for business leaders to rethink their supply chain strategies, especially their manufacturing hubs. Global industries have been looking to broad-base supply sources away from China, and India has been focused on import substitution, thereby emerging as a key manufacturing destination. Further, the government’s PLI scheme has helped improve the manufacturing setup in India. Despite all the ingredients to do well in select manufacturing industries, we never got all the pieces of the puzzle right. That seems to be changing now.

Your sector preferences at the current juncture?

We like banks. After the significant clean-up since 2015, growth will pick up in the quarters ahead and net non-performing assets (NPAS) are unlikely to be high as slippages will be lower than recoveries. So, we are seeing a very benign environment for banks to improve their earnings and ROE structurally from hereon. We are positive on telecom, as the sector stands to benefit from competition consolidation and sticky consumption.

We selectively like real estate as there has been a meaningful rise in the purchasing power among those who are a part of the organised sector. Both residential and commercial spaces look attractive from a bottom-up perspective, especially in metros and other emerging markets.

What’s the ideal portfolio construct you are suggesting to your clients?

We are proponents of asset allocation. So, based on one’s analysis of assets and liabilities, risk appetite and return expectations, one will have to decide on asset allocation. There is no one-sizefits-all approach here. But having decided on asset allocation, for equity allocation, we have been offering our clients a differentiated portfolio, which is overweight on manufacturing and underweight on consumption.

This is contrary to what we have seen over the past few years, wherein consumption did much better than manufacturing. The risk-reward is more favourable in select manufacturing companies now versus the overall market.