Frothy valuations biggest risk; Fed may begin cutting rates from H2CY24: Madanagopal Ramu of Sundaram Alternate Assets
4 min read 18 Sep 2023, 10:44 AM ISTRich valuations in mid and small-cap segments pose the biggest risk for the markets, according to Madanagopal Ramu, head of equity at Sundaram Alternate Assets. He suggests holding cash and investing in stocks with long-term growth potential during corrections.
PremiumMadanagopal Ramu, fund manager and the head of equity at Sundaram Alternate Assets believes the rich valuations in specific segments of mid and small-cap space are the biggest risk for the markets. In an interview with Mint, he said one can hold some cash at this time and invest in stocks with long-term growth potential during corrections.
Edited excerpts:
Do you see the risk of inflation re-emerging as crude oil prices are high? Are we in for negative surprises?
Crude price historically is a short-term cyclical factor and a difficult one to judge.
We always see market corrections due to crude, typically, as an opportunity to invest and in portfolios, we make use of this correction to invest in some good opportunities, which we would’ve stayed away from due to valuations.
It’s important to judge how long crude prices could remain elevated and what is now going to be the peak. Given the global slowdown, it’s difficult to push a case for demand-led inflation in crude prices.
Supply-led inflation in crude generally results in a short-term spike, so there is no risk to India's growth story beyond one to two quarters.
What are some triggers that can influence the market in the short term? How do you expect the rest of the calendar year to pan out for the domestic market?
Election outcomes, crude oil price movement, and hawkish Fed are some short-term factors which can impact markets by 5-10 per cent maximum.
But the biggest risk for markets is the frothy valuations in specific segments of mid and small-cap space.
High growth built into the valuations in a few sectors in the mid and small-cap are in our opinion difficult to achieve.
This flow-driven rally in the mid and small-cap space seems to not be discounting the potential earnings disappointment that can come through in many sectors in Q3 and Q4 FY24.
What do you expect from the Fed and RBI in their coming policy meetings? When do you expect a rate cut?
Rate cut in the near term looks difficult given the crude, hawkish fed, and domestic inflation. Interest rate cuts can be expected from the second half of the calendar year 2024 (H2CY24). A substantial global slowdown can help advance this scenario.
What sectors are you positive about at this juncture? Can investors still find value in the PSU bank sector?
We see major value in four themes that we keep highlighting which are playing India's growth story over the next decade.
As India doubles its GDP to $7 trillion in the next seven to eight years, we expect the following themes to grow multifold in terms of size and investing in the right companies within these themes will help create meaningful alpha for investors.
1. Financial Inclusiveness: Here we play the growth opportunities in retail credit penetration and shift from unorganised to organised lending.
2. Consumption Czars: We are positive on urban discretionary consumption growth, particularly small ticket spending, where we expect robust growth to continue supported by healthy urban job growth and recovery in rural consumption in 2023.
3. Phygital Bluechips: Here we play beneficiaries of India’s online penetration across various sectors. Technology penetration in various consumer-facing service sectors is at a nascent stage, in India.
4. Manufacturing Maestros: We believe that electronics, chemicals, auto and engineered goods will be beneficiaries of import substitution driven by PLI, India’s cost-competitive exports and focused infra spending by the government.
From a long-term perspective, we believe private banks and NBFCs give better options to play the retail credit penetration story and digital story. PSU banks are tactical bets given low relative valuations.
Is the worst behind for the IT sector? Should we focus on only large-cap IT stocks for investments?
It seems like the worst is behind us, but the impact of high-interest costs on the IT budgets of MNCs is under-appreciated growth may remain weak for a longer period which is not being factored in valuations currently.
We will look to invest in some mid-cap names that can benefit from global digital spending, at appropriate valuations, which looks improbable as of now.
Is it time to hold cash or can we increase our exposure to riskier equities?
It’s time to be selective, one can hold some cash and invest in stocks with long-term growth potential during corrections. However, the India growth story will always provide enough opportunities to make a substantially higher return in equities compared to other asset classes over the next decade.
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