When comparing the current scenario to that in the past 4-5 years, the specialty sector is expensive now as stock prices have risen.
Arun Malhotra, who co-founded CapGrow Capital Advisors and serving as the portfolio manager, believes the current risk factors will continue till October-November. The next year will see some stability and towards the end of 2023, the equity markets will show some up swing.
"There is also massive shorts created in the interim that could also fuel the rally," he says in an interview with Moneycontrol.
Malhotra shares that these are times to increase the equity allocations. "One should earn high teens returns from these levels from a 12-month perspective. Volatility helps in buying good quality businesses at reasonable valuations.
He would love to bet on insurance, pharma, and even technology stocks if prices go down further. Excerpts from the interview:
What is the message you get from the Federal Reserve's decision and commentary as the market sentiment had turned weak before this event?
The message is loud and clear, inflationary pressure has to be curbed at any cost, and in the process that will hurt growth. The Fed and the markets are aware that Fed is behind, and may have to aggressively cut twice before it starts to see some impact on inflation.
Do you see any chance of concerns like inflation, recession, policy tightening, FII selling and geopolitical crisis getting abated by the end of this year and the next year will be the best for the equity markets?
My sense is that this will continue till October-November of this year. CY23 will see some stability and later part could be good for equity markets.
Lot of technology stocks, including FANG (Facebook or Meta, Amazon, Netflix, Google) are down considerably while the SPACs have been beaten down heavily, some even close to 80 percent. So the froth has gone away to a large extent. Once the situation in Ukraine as well as commodities including oil stabilises, we should see a short covering rally.
As we have lot of risk factors across the globe, have you figured out themes that can generate healthy returns?
I would bet on insurance, pharma, and even technology if prices go down further. Technological advances is here to stay, innovation is now part of the survival mantra, and we will keep seeing new age tech companies sweeping the businesses. Pharma is a well-insulated business and generally does well in these uncertain times.
Do you expect double-digit credit growth this financial year despite current weak macro environment?
The Indian economy is on a very strong wicket, barring some volatility due to macro global events. The earnings trajectory should be in mid-teens for corporates, and I expect credit growth to be in the range of 8-10 percent going forward. Capex has not happened for years now, and lot of companies are deleveraged. They have the debt appetite to take capex plans. The retail demand in consumer durables, two wheelers is strong that should drive the retail credit.
After sharp correction from record lows, do you think we are near the bottom of the market and do you expect equity allocation in portfolio to increase now?
These are times to increase your equity allocations. One should earn high teens returns from these levels from a 12 months perspective. Volatility helps in buying good quality businesses at reasonable valuations. Much better than euphoric times when an investor just keep chasing the prices, forgetting the value.
Who should be more worried about inflation (CPI at 7 percent and WPI at 16 percent) - bond investors or equity investors, and why?
Both should be worried, bond investors are worried about rising yields leading to bond prices coming down and taking a mark to market hit. For equity investors, growth is the key risk. Rising interest rates will hurt growth as well as increase the discount rate for the DCF, lowering the Valuation/ DCF value of the company.
Do you think the specialty chemicals sector is expensive now?
When comparing the current scenario to that in the past 4-5 years, the specialty sector is expensive now as stock prices have risen.
The outlook is strong due to the increased demand in the Indian Specialty Sector primarily because of the stringent environmental policies in China and now with the global chemical players recognising the need to diversify away from total dependency on China during the COVID-19 and the manufacturing competitiveness that India provides, has increased the growth potential for the specialty chemical sector.
With this positive outlook, even the government is taking initiative by planning a launch of a PLI (production-linked incentive) scheme for the Chemical sector and promoting “Atma Nirbhar Bharat”. With all these tailwinds, we expect the Specialty Chemical industry to expand at a 10-12 percent CAGR until FY2027, and thus expect the sector to keep the surge going.
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