Do you think this out of turn move by the RBI and the fact that more rate hikes are in the offing, that is something the market has begun pricing in and we will see further downside from here?
It is difficult to predict how the market will react but the reality is that interest rate hike was long overdue and the only thing that RBI has managed to do is to regain or recoup some of its lost credibility in terms of not recognising the fact that they are way behind the curve. So to the extent that higher interest rates automatically imply that all asset prices have to be lower simply because the interest rate falls in the denominator and therefore future cash flows should be valued lower.
There is bound to be some reaction for almost all kinds of asset classes and we are just beginning to see that in the Nifty as well. Do not forget that Nifty has been one of the best performing indices across the region and across the world probably and it has held up far more strongly and people have been attributing it to the earnings, etc, If one looks at where the valuations are it is way higher than what it should be even across valuations. Therefore, it is only natural and maybe this is a trigger that we were waiting for but the market should be settling at a lower level than where we are.
In this readjustment, where do you think the market would fall? Is it going to be the growth names along with consumption that is going to take a hit? What will hold up the markets?
I cannot tell you how far it will fall. It is not something that I can determine with any degree of precision. I will leave that be but which sectors will likely do well are those or will at least relatively outperform the rest of the market are those where the cash flows are near term.
If you were to still look at discounted cash flows as the value driver, even in the eventual term any time that you have a market where the earnings estimates are far away, all the new-age companies that have recently got listed for example assumed that they will continue to show rapid growth which will come at a price and therefore you will not make profits. So in a way they are long bonds and if you were to look at long bonds, obviously the sensitivity to that in rising interest rate scenarios are a lot more on the downside.
So anything which has current cash flows, which are reasonably priced are likely to do better as opposed to anything which has got very futuristic kind of projections, cash flows and they are the ones that will correct the most.
The so-called high growth stories which are sacrificing current numbers for the future will likely react far more negatively. In terms of the sectors itself, those sectors which are able to pass on some amount of increase in the prices that we are seeing in inflation and yet maintain some level of volume growth will do better than those that cannot. In the near term, that essentially means that you are looking at commodities, you are looking at banks and perhaps to some extent you are looking for import substitutes.
Is the worst for IT behind us in terms of valuations, attrition concerns? With the Fed very convincingly saying a) it is sticking to the dot plot and saying that the economy is going to continue to run in good shape, IT would not have it bad even in future?
I think IT has had a very good run in terms of its demand for a change for the last 12 to 18 months and I do not see that changing anytime soon. The challenge in IT today is really in terms of the manpower and the cost that is causing the margins to get squeezed a bit.
In terms of the valuations, given the fact that the earnings will only grow low teens for most companies, the valuations are closer to 25-30 times and does not leave much upside. So you would expect that it would be a kind of moving along with the market at best. One would expect a market performer kind of performance from the sector unless the market collapses dramatically in which case, there is a certain resilience that IT has because the order books are good and strong and that does not seem like it is easing off soon.
On the other hand, if there is a kind of shock to the market on the downside, then some of the pricing pressures may actually come off in terms of the manpower. Overall, I would think that from a defensive point of view, it is a great sector to be in.
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