Dalal Street Voice: Focus on winning themes like Infra, healthcare, education, Abhay Agarwal of Piper Serica tells long term investors

Abhay Agarwal, Founder, and Fund Manager, Piper Serica said that while the year 2021 was an exceptionally rewarding one for equity investors we believe that markets will give back some of those gains in 2022 especially in frothy and speculative assets.

Infrastructure, healthcare, education, self-dependence through PLI schemes, etc. are part of the long-term theme that long-term investors should focus on, Agarwal said in an interview with Zeebiz's Kshitij Anand.

Edited excerpts:

Q) RBI surprisingly maintained a dovish stance in February monetary policy while keeping interest rates unchanged. What rate trajectory you foresee in near future?

A) The Reserve Bank of India (RBI) has sent a clear signal to the markets that it will prioritize growth over inflation. It has continued with an accommodative stance despite the inflation remaining higher than its target rate. It has maintained its inflation forecast.

While it is heartening to see this stance at the same time there is a worry that RBI may fall behind the curve in case inflation spikes. Oil prices are a major contributor to inflation and there has been no hike in pump prices since international oil traded at $75 compared to $95 right now.

With commodity prices firming up again there is a possibility that RBI may be forced to hike rates ‘sooner and faster’ just as the Fed is being forced to do right now.

The economy is opening up rapidly post Omicron wave leading to demand spikes while the supply side remains constrained. Our view is that RBI could be forced to change its accommodative stance in the event of a spike in inflation.

We expect the reverse repo rates to be increased by 35-65 basis points and repo rate by 25-50 basis points in the next couple of policy meetings.

Q) Indian market picked up momentum post Budget after initial US Fed jitters stabilized. What are your views on markets for 2022? What will be the next trigger for markets?

A) We expect the markets to be extremely volatile with a negative bias over the next couple of months. Inflation targeting by the US Fed and other central banks, oil price spike, and geopolitical risks will keep the markets on an edge in the foreseeable future.

We are seeing large global investors getting into cash for the time being by rushing out of risky assets. While the year 2021 was an exceptionally rewarding one for equity investors we believe that markets will give back some of those gains in 2022 especially in frothy and speculative assets.

While long-term investors will be able to ride this volatility, short-term traders, especially those with leverage, will find it very hard to survive.
 
Q) Budget 2022 was focused on boosting growth – do you see sectoral rotation taking place? Which should long-term investors focus on?

A) Budget 2022 spelt a clear statement of intent from the government that it wants to pursue long-term economic growth and will provide all policy support to sectors that are critical for the same.

Infrastructure, healthcare, education, self-dependence through PLI schemes, etc. are part of the long-term theme that long-term investors should focus on.
 
Q) Which themes will dominate markets in 2022 – value or growth? We saw a lot of liquidity chasing many mid and small-cap stocks in 2020-2021 to tap growth. What are your views?

A) In the rush to make money, investors bid up growth stocks to unsustainable levels in the last couple of years. The hot IPO market over the last six months saw the peak of this trend.

As investors become risk-averse, we are seeing a massive correction in valuations of a particular segment of growth stocks. However, there are no signs to say that value stocks with their cheaper valuation are seeing any inflow or are benefitting.

Since the value stocks did not give any returns to investors over the last 5 years, their correction is also muted.

We believe that when the markets settle down investors will return to well-managed growth stocks, even those that trade at a premium valuation since equity investors generate their returns by betting on growth.
 
Q) Crude seems to be on the boil. What is your call on the commodity market in 2022?

A) The world created a nonsensical narrative over the last decade around a fall in demand for carbon fuels. As a result, and particularly during covid times, the big oil companies found it non-remunerative to invest in exploration.

The popular consensus was that renewable power will soon overtake carbon fuels. The world is now paying the price for this massive mistake. As demand spikes, there is suddenly limited supply.

We think that crude prices will stay elevated in most of 2022 till new rigs get deployed and supply increases. The world also needs to introspect about the time it would take for renewables to really replace carbon fuels.
 
Q) Are there any sectors poised for re-rating given the government's focus on pushing CAPEX?

A) The government has been spending on CAPEX for the last couple of years, but the private sector CAPEX has not kept pace. Till private CAPEX picks up the pace we do not see much room for investors in Capex heavy segments like cement, steel etc.

Anyways, sectors that benefit from large Capex projects have limited pricing power and have historically failed to reward investors on a sustained basis.
 
Q) Any new age developing themes which investors can look at for the next 2-3 years? And the ones which one can avoid amid high valuations?

A) Investors should be wary of higher inflation in most of 2022. We expect companies to go through margin compression, especially those that use crude derivatives as input costs.

With limited ability to increase selling prices, we expect to see B2C product companies go through a low margin cycle. It will be easier for services companies to protect their margins by deploying technology to deflate costs.

Therefore, investors should tilt their portfolio in favour of leaders of high-growth sectors like financial services, healthcare, education, F&B, etc. that are able to protect, and even increase margins, by very effectively using digital tech.

Investors should completely avoid companies that are loss-making, leveraged, or are turn-around candidates since they will find it very difficult to service debt in a low liquidity environment

(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.)