Growth stocks to perform better in H2 2023; expect rate cuts by FY24 end: Abhishek Agarwal of Rockstud Capital
Abhishek Agarwal expects the broader indices to catch up in the second half of the year. He believes with a lowering of interest rates and a resurgence of economic momentum, growth companies are projected to give better returns in the second half of the year.
Abhishek Agarwal, Founder & Managing Partner of Rockstud Capital - a leading Alternative Asset Management firm, thinks the year 2023 may be a year of two halves, with a challenging first half (H1 2023) and a stronger second half (H2 2023) as the risk-on atmosphere begins to take hold due to the central banks and the relaxing of their position on policy.
In an interview with Mint, he shares his views on the domestic market and the sectors that look attractive for the next one year.
Edited excerpts:
How could the market perform in the second half of the year?
During the previous 18 months of market consolidation, stock prices have become more rational and are now approaching historical norms.
If we go back in time for the past 25 years, India's broader indices have provided an average return of about 14 per cent every year.
We are thus anticipating catching up in the second half given the current context.
Foreign institutional investors (FIIs) have resumed participating. The major variables to watch are the approaching Fed policy and the commentary that goes along with it (whether or not the Fed pivots), the economic climate in the US and the development of the global markets following the recent surge.
If the total risk premium for India declines owing to time correction and as the arrival of normal monsoons in India is predicted, we should expect these headwinds to diminish as the base catches up.
What is your view on the IT stocks? Do you see them among the top wealth creators in the next two-three years?
In the IT industry, we are observing conflicting behaviours. A few midcap IT businesses have performed pretty well, despite the IT giants reporting misses in their numbers compared to forecasts.
Due to growing economic uncertainty, the markets have already reduced their growth estimates for this sector.
The market was keenly observing company comments about deal flows and the general outlook for demand.
Across all companies, the attrition rate has been seen to decrease. This is a positive trend, and every IT company has expressed its confidence that it will continue to decline.
This will provide a much-needed boost to businesses and help them improve their overall efficiency and productivity while reducing their costs.
The companies that we cover under the Yuva Bharat theme continue to see a good number of transaction wins and pipelines, particularly in the areas of cost reduction and vendor consolidation.
Additionally, the businesses have profit levers in the form of increased consumer wallet share, stronger utilisation, and improved pyramiding.
We believe the Indian IT sector is on the brink of experiencing great growth due to its attractive valuation.
If the US and Europe experience a “soft landing”, cost optimisation and efficiency improvement will become more critical, which could be beneficial for Indian IT companies.
The trend is maintained due to the consensus that interest rates are likely to peak or have already peaked, which has encouraged investors to adopt more risk-on approaches. This should ensure that the IT sector is one of the top performers.
Market sentiment is improving. Should we start focussing more on growth stocks?
The markets in 2023 started the year well before facing challenges as the month went on.
The underperformance has been attributed to a range of factors, including continuous FPI selling, the reopening of the Chinese economy, the selloff in the Adani Group stocks, and the depreciation of the Indian rupee.
We think, 2023 may be a year of two halves, with a challenging first half (H1 2023) and a stronger second half (H2 2023) as the risk-on atmosphere begins to take hold due to the central banks and the relaxing of their position on policy.
Therefore, in the near future, it is expected that value will continue to surpass growth, a tendency that was evident for a significant portion of the calendar year 2022 (CY22).
With a lowering of interest rates and a resurgence of economic momentum, growth companies are projected to give better returns in the second half of the year.
Is it early to think about a cut in interest rates? What is your view on the interest rate trajectory?
In the midst of recent economic softness, rising global concerns, and forecasts of further easing of inflationary pressures, the RBI unexpectedly paused during its policy meeting.
However, the moderation in the country's retail inflation in April has validated RBI’s decision.
Retail inflation in India eased in April to 4.7 per cent against 5.7 per cent the previous month. Liquidity has tightened quite substantially over the last few months, with the Mumbai Interbank Offered Rate (MIBOR) currently quoting close to 6.90 per cent, 40 basis points above the policy repo rate of 6.50 per cent.
So, while RBI has preferred to keep the policy rate steady, tighter liquidity conditions in the money market have pushed effective short-term rates higher beyond the MSF (marginal standing facility) rate of 6.75 per cent which is almost equivalent to a rate hike even with RBI pausing in April policy.
In this rising interest rate cycle, the RBI has hiked the repo rate by 250 bps, while the Fed Funds rate has gone up by 500 bps.
We estimate that average retail inflation will be approximately 5 per cent, potentially even lower if the monsoon is good. Rate reductions may occur near the conclusion of FY24, as we anticipate.
What sectors are you positive about for the next one year?
Specifically, we are concentrating on the BFSI, IT-digital domain, consumption, domestic healthcare, logistics, and auto and auto ancillary sectors in line with our Yuva Bharat theme.
Our top favourite sector has always been BFSI, and we are very optimistic about the future.
The sector is a quasi-play on India's economic recovery, and it is anticipated that the improvement in the capex cycle and attention to local manufacturing would continue to promote credit growth. Because of growing regulatory compliance, the regulation of distributable fees, and rising costs, the asset management and wealth management industry within the BFSI sector is expected to have challenges.
PSU as a general theme also looks attractive. There have been continuous orders from governments either its defence, oil & gas, power, or infra and there’s continuous thrust on spending to support the made-in-India theme.
This itself creates an opportunity for growth. Historically valuations between PSU and private companies have to remain divergent but this can narrow down as there are well-managed companies with cleaner books.
If we see since January 2022, PSU stocks have outperformed other themes i.e. defensive, cyclical, and rate sensitive.
PSU banks specifically have seen a sharp recovery amid superior asset quality, double-digit credit growth, contained credit costs, etc.
PSUs market cap today stands around 13-15 per cent of the total market cap which has recovered from Covid-19 lows of 8 per cent whereas it has a historical average of 23 per cent showcasing enough headroom for growth in this space.
Our other preferred sector, consumption space management commentaries indicate overall sector volume growth has been flat, largely due to rural growth still elusive however some green shoots are visible towards the end of the quarter.
Two-wheelers within the auto sector have seen subdued growth along with increased competition from new-age electric-vehicle-two-wheeler companies impacting listed players.
Also, traditional two-wheeler export markets like Africa and South Asia had been impacted due to inflation, currency fluctuation and the local political environment.
Disclaimer: The views and recommendations given in this article are those of the expert. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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