Amid ongoing fall, Sachin Shah says go with leaders in these sectors

Many metals, both steel & non-ferrous, have seen their prices cooling off and as soon as crude oil prices fall, it will send clear evidence that the worst of inflation is behind us, said Sachin Shah, Fund Manager, Emkay Investment Managers. In an interview to ETMarkets.com, Shah said any significant across the board downgrades in earnings are unlikely. Edited excerpts:

How would you read the current weakness in the market? What does the previous Fed rate hike cycle suggest for domestic equity outlook?
The current weakness is clearly flowing from global headlines and global markets. Because when we see the domestic economy, most of the demand indicators suggest a very vibrant activity at the ground level. Our exports have had the highest ever revenues. Even the tax collections, both direct (Income Tax) and indirect (GST) have increased quite substantially. It is the challenges with global supply chains, due to geo-political conflicts and extended lockdowns in some key places in China, which has strained the supply of commodities and transitory bumping up of the prices.

The other challenge has been with the US Fed and other central bankers panicking on inflation and pressing the interest –rate button, clearly a global headline with knee-jerk reactions across bonds, currencies, equity, commodities, etc. spooking the global markets across.

Therefore any positive change in the global headlines and/or global markets will bring back the confidence in domestic markets, particularly after seeing the Q4 and FY22 Indian companies declared results and hearing the management commentary from corporate in the last few weeks gives a fair sense that all is well in the Indian economy.

With the Bank of England suggesting a 10-percent plus inflation and the prevailing US inflation at 8.5 per cent and India's own inflation above the RBI comfort zone, it seems it would take time for inflation to come under control globally. Do you see earning downgrades ahead?
As I mentioned earlier, I believe inflation at this point in time is a bit overstretched due to extraordinary circumstances (geopolitical tensions and China lock-down), which truly are temporary. As and when these events turn around, inflation will most likely cool off quite a bit. In fact, we are already seeing a cool-off in many metal prices – both steel & non-ferrous.

Of course, oil prices too need to cool-off and as & when that happens (hopefully sooner than later), that will be clear evidence that the worst of inflation is behind us. Observing the Q4 FY22 results and management commentaries on business outlook, it doesn’t seem like we are going to see any significant across the board downgrades, at least in non-commodity companies.

What queries are you getting from your clients? What are you advising them?
We haven’t seen too much of concern (or panic) from our investors in the recent weeks, in fact if any inquiries are on if they could increase the allocation to equities to capitalise on the current weakness in the markets.

Actually over the last few years now, we are seeing a clear structural shift in terms of the investors’ matured approach towards equity investing. Around a decade and a half back, most of the investors that I interacted with had a transactional perspective towards equities as against today when most perceive it as an asset class for long term goals – either retirement or passing to the next generation.

Name a few sectors which may get least impacted by the rising inflation. Are valuations reasonable there to make an entry?
When one looks at the demand trends, balance sheet strengths and valuations, the sectors that we believe should do quite well are private sector banking, auto (& auto ancillaries), IT, and selective pharma (CRAMS & speciality products). After the recent fall, many of the leaders in each of these sectors are trading at very reasonable valuations.

Just this year alone, FPI outflows have hit Rs 1.4 lakh crore mark and many largecaps have been hit hard. Do you think a rate hike cycle would be worse for midcap and smallcap stocks? What would you be buying in this market?
FII / FPI selling has been a very important dynamic in recent times, but history has taught us there is always an invisible hand in the markets, which comes into play at the right valuations. We strongly believe that like water finds its own levels, if the fundamentals and outlook of the country, sectors and companies that you invest in are positive, then the invisible hand (money flows) will get attracted to our markets.

At this point in time, we believe the Indian economy is on an up-cycle and therefore when there are tail-winds in the overall economy the mid and small size companies’ performance is much better over that period.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)