ETMarkets Smart Talk: Earnings downgrade cycle likely to bottom out over next 2-3 quarters: Rakesh Parekh

In an interview with ETMarkets, Parekh said: “We believe this is the time to focus on good quality companies in structurally attractive sectors” Edited excerpts:

Benchmark indices broke below Budget Day low earlier in March and bounced back. What is spooking markets right now? What are your views?

Markets continue to climb a wall of worries. Overall, the specter of a global slowdown, stubborn inflation, and high-interest rates continue to weigh on sentiments.

A cyclical consumption slowdown due to high inflation and the high base effect of post-COVID pent-up demand is currently underway as highlighted by the recent GDP data.

The rural economy remains subdued along with the El-Nino possibility of further difficult conditions later this year. In this environment, where the US Fed rates may remain higher for longer and global liquidity remains tight, the pressure on Indian markets are likely to persist.

The silver lining is that commodity prices currently remain broadly contained and inflation pressure continues to stablise.

Cyclical issues notwithstanding, the underlying structural strength of the Indian economy and its macro indicators remain relatively robust. Indian markets have also corrected to more reasonable valuations of 19x p/e for 1-year forward FY24E.

Market consolidation should continue, and as the earnings downgrade cycle bottoms over the next 2-3 quarters, the structural strength of the Indian earnings cycle should resume with renewed vigour from a 2-3 years’ perspective.

Significantly lower leverage should support earnings and valuations. We believe this is the time to focus on good quality companies in structurally attractive sectors.

SEBI highlighting pump and dump trades is a welcome move – what would you advise retail investors on how they should consume info which is freely available?
SEBI’s strong action and advisory is commendable and should be listened to by retail investors which can safeguard them against fraudulent investment advice.

Chasing the promise of quick returns has historically proven to be a mirage for wealth creation.

Investors should seek qualified and registered investment advisors for their investment requirements. Free and cheap services often involve hidden costs as the unearthing of frauds by SEBI has proven.

What is your view on global diversification in 2023? FIIs seem to be moving away from India and investing in other EMs and treasury amid higher valuations.
In the post-COVID era, investors have been viewing India as a defensive growth market which has helped us significantly outperform global indices in 2021 and especially in 2022, as the Emerging Market growth outlook was weak with China in self-imposed Zero-Covid restrictions.

With MSCI India’s relative valuations rising to almost a 70% premium to MSCI EM (Emerging Markets) valuation, flows have been moving to China on its reopening at the expense of India.

Additionally, since markets were pricing an end to the rate hiking cycle in 1Q 2023 and commencing of rate cuts in 4Q 2023, capital is chasing the cyclical recovery beneficiaries.

However, markets have again been found wanting for the pivot from a hawkish central bank stance. As the markets brace for higher rates than earlier anticipated and a longer restrictive policy, the assumptions for an upbeat outlook for global growth are likely to get re-assessed as we progress through the remainder of the year.

Do you think women investors/traders have increased especially after COVID? Women are more aware of their finances than before.
In general, post COVID, overall demat accounts grew rapidly due to various factors which encouraged trading and investing from remote locations.

This was also supported by rising markets, which saw Total demat accounts cross 100mn by Aug’2022 and the number of Active account users peak at close to 40mn around the same period.

However, in the last 6 months as market conditions have weakened, combined with a declining flow of new issuances, we have seen active accounts come off by approx. 4mn from that peak.

Going forward, we expect incremental growth in the number of Demat accounts as well as active users due to India’s growing economy as well as a much higher level of financial savings directed towards equity markets.

Consequently, we have also witnessed a rapid expansion in Mutual Fund folios which have crossed 140mn in Jan’2023 along with rising levels of SIP-based flows.

In this context, with a higher proportion of women across the broad spectrum of the workforce, as well as increasing awareness of investing and financial literacy would further broaden their participation.

An incrementally higher number of women entrepreneurs and founders have also helped to raise the profile of women investors in the fast-growing Indian economy.

What is your take on the GDP data which has slowed down? Do you think this could push away smart money?
While headline GDP growth has slowed down due to the high base effect of last year and inflation is weighing down on consumer spending; broader spending patterns and consumer sentiment remains strong vs other nations, as can be seen from the high-frequency indicators.

Hence, beyond a couple of quarters of consolidation, India’s appeal as a defensive growth economy would continue to sustain and attract flows from a structural position.

Unlike 2022 though, a weak monsoon could emerge as a risk to buoyant domestic consumer sentiment. However, if the monsoon impact remains contained, India’s resilience is likely to shine through in a challenging global growth environment.

What is your investment style amid volatility?
We remain committed to investing in high-quality companies in sectors that we understand and have good longer-term structural growth opportunities.

Additionally, in an environment of higher volatility, we would remain a bit more defensive in our portfolio strategy; through a combination of exposure to larger-cap stalwart names who are leaders in their sectors and look for relatively inexpensive stocks having low leverage and good dividend yields.

Any portfolio additions or exclusions you have made recently and why?
Broadly our portfolio strategy remains unchanged with a focus more on domestic-oriented sectors linked to consumption as well as Infra & Capex investments.

We are becoming more constructive on the IT Services sector, in that valuations have corrected significantly and a lot of the recession-related worries in developed markets are now becoming slowly discounted at current levels.

As we enter the last month before we move to FY24 – your key learnings from the financial year gone by?
Always be prepared for any eventualities. The complexity of investing is increasing in more uncertain environments coupled with an ever-evolving geo-political situation.

We believe this should focus our attention more on risk management and capital preservation as market volatility will remain high.

The over-riding emphasis should be on sticking to investment strategies that you understand well and avoiding vulnerable sectors & companies which are more heavily affected in a higher inflation & interest rate environment.

Which sectors do you see could do well in FY24 and why?
Overall banks and financials should continue to do well as credit growth is picking up and their balance sheets are in much stronger shape.

Consumption sectors such as auto and consumer staples would also benefit as we expect the economy to pick up on growth in 2HFY24 onwards.

Additionally, Cement, Capex & Infra would continue to do well as we look forward to an election year in 2024. Structurally we also remain positive on Speciality Pharma & Chemicals as well as companies that would benefit from higher levels of out-sourcing and exports, particularly Industrial & Engineering goods.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)