You have made a grim forecast about earnings after Q4, especially about a hit on loan growth both commercial and personal loans. I am asking you if this is going to be the direct fallout of our interest rate hikes? How much will it have to do with the current meltdown that we are seeing in the banking universe?
US meltdown does not really impact us but we would in any case be slowing down given that interest rates have risen by more than 200 basis point in India also and it does not look likely that we are going to stop immediately. There would be another few 25 basis point hikes coming in so that is definitely going to impact the demand. And there are certain signs coming from auto companies that things are slowing down and inventory is little bit building up at the dealer level. So, markets did really well in the last two years, it is time for consolidation and there is global uncertainty, so I think markets are stuck in a range of 16,800 to around 18,000. I do not think we will violate this range for quite some time right now till the time there are further catalysts in the global markets. What is your overall sense on the Indian markets, are we likely to show some amount of resilience, you did mention the range that you expect the markets to be in in FY23-24 but do give us a sense of how the Indian markets are going to weather the kind of volatility that we might see elsewhere in the world.
I do not think we are unplugged from global markets or global macro situation and the global money flow or capital flow is what really determines where the markets move and clearly given that it was risk-off trade happening, emerging markets have been at the receiving end.
Within the emerging markets a reopening of China attracted a lot of capital, so India was underperforming, now maybe the underperformance might have come to an end but there are no triggers on the upside immediately.
So that is why as I said that we are currently at 17,000 and maybe there is not too much of downside from here on because now we are closer to long-term averages on multiples for the Nifty 50, so maybe we go down another two-three percentage point but upside is also limited at the moment till we are able to see some turnaround in global markets.
Also do not forget that El Nino conditions are forming and that has bearing on our monsoon and rural demand so I think probably by Diwali we will have a better clear picture whether the markets are going to rally from out of this range or not, but till Diwali I think we are stuck in this thousand point range.
Many are pointing towards Fed’s rate hikes and that perhaps has been a trigger for the collapse we have seen of Silicon Valley Bank and perhaps this is something they will bear in mind for future interest rate hikes. As it happens, we are going to be watching exactly what they do with interest rate hikes, but how is the Fed move going to affect corporate growth in India and how is it going to affect our markets in your understanding?
After the debacle which has happened, expectations of further rate hikes have diminished quite significantly and so we need to see how Fed really moves from here on. Probably there may not be too much rate hikes from the current level. However, inflation numbers are still very sticky. So, I do not see that they are going to cut interest rates also in 2023. So, probably it is like wait and watch for them and hope that inflation comes down. So, coming to impact on India, meaning if global markets are stuck in that kind of a situation, RBI has no reason to really cut interest rates or in fact they might have to inch it little bit up from here on.
See, US saw more than 500 basis point rate hike, we have seen around 200 basis point, so the situation in India and Indian banks is not that alarming. So apart from a minor impact of slowdown on growth, I do not really see any too much risk on India and that is the reason the call I am making that we are not very far from the bottom. It is just that the upside catalysts are missing. What is the strategy that one should approach investments in the Indian markets at this stage?
The clear story is only going to be government capex because they have allocated budget for almost 33% increase in infrastructure spend. So, I think being a pre-election year, they are going to focus on spending that amount, so, infra plays definitely is one of the safe havens in this uncertain market. And second, defence spends are unlikely to come down and this government is quite focussed on increasing domestic purchases. So, defence sector again is looking extremely well supported. So, these two are like clear-cut stories at the moment in the market.
And what about the metals universe? How is the future looking both for ferrous and non-ferrous businesses and how much of the China opening up story is going to reflect in our metal stocks here?
Metal stocks, they had a very poor second half of 2022. First half of 2023 is slightly better and there is a mean reversion happening in the margins. You might recall that most of the steel companies were loss making in Q2 and things slightly recovered in Q3. So, Q4 would be an improvement over Q3. But is there a bull run happening? That is unlikely, because despite China opening up, demand is not playing out as everybody expected. China during COVID was trying to support the economy and they had pump primed infrastructure spend, so after the reopening, they have not really been able to increase it any further so there is hardly any demand pull coming from infrastructure beyond what was already there in 2022.
At the same time, housing issue remains something which is unresolved at the moment despite government measures to support it. The real demand for housing in China is around say 0.7 billion units, whereas they are still constructing around 1.2, 1.3 billion units so there is an excess supply out there. And the way Chinese government has fixed the GDP growth target for current year at 5%, which is lower than what everybody is expecting, I think demand for commodities is going to be restrained, so that limits upside when you combine that with the slowdown that we are likely to see in the developed world.
So overall, I would say that metals are in neutral zone, they will be like a market performer. Valuations are not very cheap but they are reasonable and so they will swing along with the market. I do not expect major moves on either side.
Since we are talking about the SVB collapse, there is collateral damage in India’s tech sector as well because as far as Silicon Valley Bank is concerned, it was popular among Indian founders who needed those US accounts and that is why they have exposure to some of those banks. As far as the tech sector is concerned, Meta is talking about more layoffs, so the meltdown in the IT sector continues. How much of that is going to play out as far as the stocks in our IT universe go and as far as the future of the entire sector looks at this stage to you?
IT sector saw meaningful correction but this whole SVB fiasco is only a sentimental negative because US government has moved really quickly to safeguard all the deposits. So, most of the IT companies who have deposits with these banks are safeguarded, so they will get their money back so that is not an issue. But overall, demand picture is looking to deteriorate a little bit further and despite the correction IT stocks are not extremely cheap, meaning they are trading around still one standard deviation above averages. So, I think they can still come down a little bit further because valuations are not really that supportive and demand outlook is looking slightly weaker than what it was before this debacle.
What do you do with banking stocks right now? What do you do exactly if they are in your portfolio? Do you stay put? Are you looking for opportunities? What exactly? How are you treating the private banks and the PSU banks as well?
I think banks are looking very attractively valued and some of the banks are closer to where they were during COVID time in terms of valuations. So, I do not really see any major constraint on that side at least. Demand outlook still remains reasonable. It is just that their deposit growth was not happening and deposit rates have now started to increase but normally that happens with a lag so the NIM compression would be slightly slower. So, at these valuations my advice would be to stay put in the banking sector. There is not too much of downside from the current valuations for most of the stocks.
