SVB collapse has indeed triggered some uncertainty in financial markets. Are we heading for another financial crisis?
The challenges that we are witnessing are mainly to do with the rising global interest rates and their impact on the global bond markets.
However, we need to note that the US FED and other central bankers have been fairly clear in terms of their intent, actions and future direction for more than five quarters now, which means there was enough time for the bank treasuries and financial institutions to correct and realign their positions and take necessary actions for damage control.
But it seems some of them have not been prudent enough. Looking forward, we would like to believe (and hope) that majority of the institutions would have learned from the GFC 2009 and this time would have enforced many more risk management measures internally to avoid any kind of catastrophic events.
Once the dust settles down – which stocks/sectors are likely to see a bounce back or see a reversal?
Uncertainties, both in global economies and in global financial markets, will continue to cast their shadows on the Indian capital markets.
Also, in the domestic markets, we have seen pockets of slowdown, particularly on the consumption side, which was also reflected ion Q3 FY23 earnings season.Cooling off Oil/Crude prices to decisively below US$80 will be the silver lining and a critical factor for the Indian economy.
The Capex trend seems to be on the rise, and most of the capital goods-related businesses have encouraging commentary on the order book and on new order pipeline visibility. Export & PLI-related sectors are also ramping up the capex.
Even though the stock market is volatile – there is a breather in commodity space. What is the kind of impact you see on India Inc. earnings and respective sectors?
Yes, clearly the manufacturing-related inflation is under control. Most of the metal prices, both– ferrous (steel) and non-ferrous (Aluminium, Copper, Lead) have corrected quite a bit and don’t seem to be in any hurry of bouncing back.
Also, the oil prices coming down decisively below US$ 80 is a big relief for the entire raw material chain, particularly the Indian manufacturers.
We, therefore, believe Gross Margins to be stable to better for many companies in the next couple of quarters.
However, whether this flows down to operating margins, will depend on product categories and will vary from company to company, as we are seeing some demand slowdown in select pockets, that may impact the top-line growth of companies, leading to some negative operating leverage.
We have seen some selloff from FIIs, but how do you see flows panning out in FY24?
In FY 23 (till last week, nearly 11.5 months) FIIs have been net sellers of nearly US$8bn (Rs 62,000 cr). But more importantly for CY 23 (last three months), as FIIs allocations are based on a calendar year (Jan to Dec) they are net sellers of nearly US$4.6bn (Rs 38,000cr) nearly 60% of the last twelve months.
Clearly, the selling in the last three months has gotten much more intense, driven by the uncertainties in the global economies and global capital markets.
Therefore, looking ahead it is important for global markets to settle down to have positive flows from FIIs.
As recession fears increase there is some action seen in Gold. Do you see Gold outperforming equity markets in FY24?
Gold has done quite well over the last twelve months. I think that this has not only been due to recession fears but more related to challenges with the global currencies, including the US Dollar, with no credible alternative.
Somewhere the US FED also probably realizes the risk of their bloated balance sheet & debt on the US Dollar currency, and therefore there is plenty of action by the US Fed on reducing the balance sheet, to bring about some damage control.
But, till the time a credible alternative does not emerge or the US Fed does something dramatic to correct its position, probably Gold will be on top of mind for global investors, including central bankers worldwide.
For a long-term investor – should he/she be worried? Or should they rejig their portfolio?
The fun of investing in equities, as Einstein mentioned, is the eighth wonder of the world – The game of compounding.
Hence, if one is a long-term investor, I think the clear focus has to be on where they see the businesses they own over the next 3-5-7 years, and if they believe they would grow at a much faster pace than the nominal GDP growth of the country, there is no case to rejig the portfolio or to be worried.
They should just take volatility in their stride and ride it, as returns post the volatility will be far superior.
Any sector which could turn out to be the dark horse in FY24?
Sectors like Pharma (CRAMS), Chemicals, Auto & Auto-Ancillaries, Engineering – Hard core engineering, defence related, power equipment related, and electronics manufacturing are all trading at reasonable valuations and have good growth potential over the next 2-3 years.
Sachin Shah
Fund Manager, Emkay Investment Managers Ltd.
Sachin is a seasoned fund manager with over two decades of experience in the Indian equity markets. By virtue of his extensive research, Sachin realised early-on the need for a framework in which companies with evasively tricky standing needed to be filtered out very objectively, leading to the development of E-Qual Risk, EIML’s proprietary module which helps us to evaluate and compare listed companies on various aspects of governance. Sachin shares his knowledge and insights through various media interactions across print and digital platforms.
