'Valuations are very attractive, and most companies are cash-rich with strong dividend yields.'
"I would avoid cyclicals and expensive durables in the current scenario given their vulnerability to high growth risks," Shiv Sehgal, president and head for institutional equities at Edelweiss Securities, tells Nikita Vashisht.
What is your assessment of India's medium-term macroeconomic landscape, given the global headwinds?
The near-term global environment is clearly challenging with both oil and interest rates moving higher. However, what's different this time compared to the previous episodes is the balance-sheet strength of the domestic financial system.
Unlike in the past, both banks and NBFCs are perhaps more capitalised than they have been in a decade and, hence, have high resilience to global shocks.
Corporate balance sheets, too, are quite resilient. Hence, the medium-term impact of global headwinds isn't likely to be much.
How are foreign investors viewing emerging markets and India in particular?
Despite the correction, our valuations relative to other EMs haven't yet come off. Thus, foreign institutional investors are a bit cautious on EMs, in general, and India in particular.
What is your investment strategy?
The current dynamics of oil shock, along with central banks looking to tighten more aggressively, is likely to accelerate the growth downturn in the near term. Hence, it's best to pivot towards quality.
Within that, autos, FMCG (fast moving consumer goods), and private banks are our preferred bets as these are the pockets where demand is currently depressed and valuations reasonable.
That apart, we continue to like the IT sector given the strong spending and as a hedge against rupee depreciation. I would avoid cyclicals and expensive durables in the current scenario given their vulnerability to high growth risks, respectively.
Why would you invest in FMCG given the input cost pressure?
Rising input costs are certainly a challenge for all manufacturing companies, especially in the context of weak demand.
It's best to play companies that have strong pricing power and products with lower demand elasticity; have a lean cost structure and a strong track record of maintaining margins by lowering costs elsewhere; strong balance sheet and capital allocation track record; and look at relative earnings growth as growth is likely to be a challenge everywhere.
Can investors continue to look at energy-related stocks or have they missed the bus?
Given global central banks' hawkishness and divergent global growth, there could be headwinds for energy-related stocks from a medium-term perspective. However, these stocks could rally in the near-term if the war drags on.
Which other sectors look attractive as contrarian bets?
Auto is an extremely attractive contrarian bet.
This is a space where the down-cycle has lasted for three-four years (which is unprecedented) and structural concerns regarding the transition to electric vehicles are at their peak.
Valuations are very attractive, and most companies are cash-rich with strong dividend yields. Incrementally, recovery will be led by autos given the very low base.
Will 2022 belong to precious metals?
Despite heavy money printing by central banks, large fiscal expansion, and negative real rates, the metals have given attractive returns over the past two years. However, 2022 may well be the year of reversal. This is owing to the current uncertain environment.
Moreover, the global stagflationary environment is very conducive to the gold rally. Finally, the recent move of the US sanctioning Russia's forex reserves may push central banks towards increasing the share of gold in their reserves.
Have you tweaked your earnings expectations for FY23?
Not yet, as the aggregate earnings growth may not see material downside given the large weight of commodities in the index. However, excluding that sector, there is likely to be a material downside in earnings expectations for FY23.