Dalal Street Voice: Focus on large caps in your portfolio amid possibility of interest rate hike: Amit Gupta of ICICI Securities PMS

Amit Gupta - Vice President and Fund Manager, ICICI Securities PMS believes that with the rising inflation trajectory it is better to focus more on large-caps.

In an interview with Zeebiz's Kshitij Anand, Gupta said that there are many large caps from the sectors like corporate linked banks, capital goods, telecom, energy which have not performed for the last many years and can start seeing good inflows.

Edited Excerpts –

Q) Geopolitical events as well as expectations of strong tightening by the US Fed, have certainly fuelled a risk-off sentiment. What is your take and how should long-term investor’s view this?

A) The US interest rate increase is almost a certainty given the sharp surge in inflation which is the highest in the last 40 years. In fact, the market has now started factoring 5 rate hikes in 2022 with a possibility of a 50bps rate hike in the March 15-16 meeting.

Historically, we have seen when US interest rates were increased, the major move in US bond yields had come before the event.

During the rate hike cycles, the bond yields don’t show the same uptrend. In 2004-2006 despite 4% rate hike, US bond yield moved up by only 39 bps and in 2016-2018, it moved up by only 90 bps despite a 2.25% rate hike. Thus, major market jitters are seen before the first-rate hike.

Q) What is your take on the December quarter earnings and what is the kind of projections you foresee for FY23?

A) Despite margin pressure, good volume growth was registered in Consumer discretionary segment. Also banking, IT and Energy have seen good revival in earnings.

In fact, Q3 was a seasonally weak quarter for IT companies but they posted good results with higher hiring which gives good earnings visibility.

The domestic earnings have shown remarkable growth with Nifty EPS moving from 430 to 735 within 2 years which is the reason of market resilience despite global headwinds. For FY23, EPS is expected to grow by 18%.

Q) Last two months have been volatile how have you positioned your portfolio to tackle volatility amid external headwinds?

A) When global headwinds are seen, it is always better to position the portfolio with domestic cyclicals. We have good allocation to banking and financial services along with Cement, Capital Goods and Telecom.

Banking NPAs have seen a sharp decline from 11.5% to 7.3% in the last 4 years. Now credit growth has also seen recovery from 5.5% to 8.2% in the last few quarters.

With 35% higher government capital expenditure expected in FY23, capital goods also may see good surge in order book.

Also, telecom stocks are on recovery path post the tariff hike of 20% seen in prepaid. ARPU’s have started moving higher in this space.

Q) Inflation might certainly become a pain point for the economy as well as RBI – what trajectory you foresee for the rate in the next 12 months. How should investors position themselves to tackle the change?

A) With the US rate hike seen quite near, rate hikes in India are also almost a certainty despite the dovish stand by RBI. Historically, the inflation in India used to be higher than the US by 250-300 bps.

Now, the trend is reversed as the economy is recovering post pandemic impact and a record-high stimulus is given by the US.

Indian bond yields have already reacted to a surge in the US bond yields and we believe they are factoring in the rate hike cycle going forward.

India's inflation has also moved higher to 6.01% from last year’s 4.06% in the same period. The higher crude prices may keep inflation sticky for sometime as geo-political issues have also cropped up.

Q) Small & midcaps have clearly outperformed in the past 2 years with handsome margin – how should investors view the space in FY23?

A) We believe with rising inflation trajectory it is better to focus more on large caps. There are many large caps from the sectors like corporate linked banks, capital goods, telecom, energy which have not performed for the last many years and can start seeing good inflows. We may see more money flow into value space in FY23.

Q) If someone is running a portfolio with deep red – what should be his/her strategy before the financial year-end. Hold positions or exit stocks. If exit then which stocks/fund should the investors' exit from?

A) The sectors, which had seen a good run up have succumbed to profit-booking before the rate hike cycle. Sectors like Chemicals, Metals, IT, and consumers are going through this phase.

The volatility may persist for some more time and thus investors should be ready to utilise the opportunities coming because of recent jitters.

Quality stocks fall only for limited periods, which doesn’t happen too often. One should look for earnings growth in the stocks/sectors.

When the market will get stable, sharp upsides would be seen in the stocks posting higher than expected results.

Q) How do you see FII activity in near future considering FIIs clearly remain net sellers? There is a saying that when FIIs exit – it is usually the best time to book profits?

A) Volatility is rising due to the absence of FIIs buying. In FY22, FIIs net inflows have remained negative only. However, when we see the period from October 2020-March 2021, we had seen one of the best inflows of Rs 2 lakh cr by FIIs in Indian markets.

This was the time when Nifty moved above the last 4-5 years hurdle of 12000 and inched towards 15000. Thereafter the FII flows have almost dried out and they are waiting on the sidelines to see off the volatility before the first rate hike.

We have seen Nifty spending 6 months between 15000-16000 and now 5 months within 16000-18000. There may be more consolidation possible before the new highs are seen again.

Q) The recent selling was largely seen in high PE stocks which low PE stocks did not see much sell-off. Can we say that smart money is now moving out of high beta counters and richly priced stocks?

A) Markets discount the future earnings growth which is where sharp run-up is already seen. More consolidation is possible going ahead.

Money has been moving from richly valued sectors to value space. In fact, the P/E normalisation is seen in Nifty also in the last couple of quarters of consolidation.

Price-wise index is not going anywhere but corporate profitability as % of GDP has recovered from the lows of 1.6% (in March 2020) and recovered to 10-year highs.

It is expected to reach 4.5% in FY23. This is where the P/E multiples of 22x have been reduced to 20.4 in Indian markets which should be a sign of relief.

Q) Govt has notified the first phase of the green hydrogen policy. What does it mean for markets and which companies are likely to benefit the most? Does that also mean that companies with high ESG ratings will be considered for investment by foreign funds?

A) Yes, the Indian government has a larger vision to cut India’s dependency on fossil fuels and promote cleaner forms of energy. As part of the policy, the government will waive inter-state transmission charges for 25 years to manufacture green hydrogen and green ammonia.

Few companies like Reliance Industries are looking for major CAPEX in renewable energy of Rs. 75,000 cr. in coming 3 years. Other companies are also coming forward which should help them to gain a good ESG rating.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)