At a time when most stocks are down year-to-date (YTD), Jaspreet Singh Arora, Chief Investment Officer, Research & Ranking, sees a few factors in favor of Dalal Street. In an interaction with Business Today, Arora also shared his main themes, his investment strategy and his views on the buying opportunities available in the down market. Edited excerpts:
BT: Do you see a glimmer of hope amid the lingering uncertainties in the equity market in the form of rising inflation, large outflows of FII funds, geopolitical crisis and falling the rupee?
Jaspreet Singh Arora: Improving business health, higher credit growth coupled with government focus on infrastructure and growing appetite for investment in new era sectors are making India resilient. India recorded the highest ever annual inflow of FDI at $84 billion in the financial year 2021-22 and is among the top 10 recipients of FDI globally. At present, India remains an attractive destination and is among the top five countries in terms of GDP. India is one of the few emerging economies with sound short- and long-term fundamentals and is considered the fastest growing major economy in FY23, with average growth expectations of the GDP of 7.4% (the IMF estimate of world GDP for the year 2022 is 3.6 percent, China 4.4 percent).
Excise duty cuts, export duty increases and government export bans, ably backed by normal monsoon expectations, have helped manage inflation to some extent, while the fall of the rupee will benefit export-oriented sectors such as IT, pharmaceuticals and chemicals. Our foreign exchange reserves are quite sufficient to avoid any currency crisis given the external shocks faced by other countries. The economy has had its share of challenges, but it is well positioned to come out on top.
BT: How do you see the stock market continuing to move in the current year?
Jaspreet Singh Arora: Corporate earnings are expected to remain healthy despite near-term fears of inflation and recession in the United States. Nifty’s earnings per share (EPS) is expected to increase 18% in FY23 and 13-15% in FY24. A period of consolidation or timing correction amid volatility is anticipated short term before we start making bigger moves.
BT: What advice would you give to investors who are suffering heavy losses and to those who are left on the sidelines?
Jaspreet Singh Arora: Up to 20% of NSE 500 shares fell 10-20%, while an incredible 65% of NSE 500 shares fell 20%-50% from their 52-week high. For those experiencing heavy losses, it is worth assessing the fundamentals and growth potential of stocks in their existing portfolio and we suggest exiting stocks where earnings will face short-term headwinds or where fundamentals do not are not in very good condition and to turn to quality names that have proven themselves. robust revenue and profitability growth while maintaining earnings ratios and should continue the momentum of earnings growth over the next 1-2 years. For those who stay away, the investment can be made over the next 3-4 months in a staggered fashion.
BT: Can you tell us about your investment strategy?
Jaspreet Singh Arora: In terms of strategy, we have a long-term view, which is fundamentally focused and we aim to generate alpha by taking Nifty as our benchmark. We have a strategy with 10 basic rules on qualitative and quantitative measures to preselect stocks. Our portfolios are divided into three categories: structural growth with a 3-5 year view, dynamic stocks with a 1-3 year view and special opportunity with a 1-year view.
Although current valuations look attractive, we would normally suggest investing at least 50% of your investable corpus now and the balance staggered over the next 3-6 months. Since October 2021, mid and small cap indices have fallen 17% and 28% respectively, compared to 14% for large caps. We currently favor mid caps and select large caps with strong fundamentals, keeping in mind prudent asset allocation and volatility risks.
BT: Which themes do you think will outperform in the next rally?
Jaspreet Singh Arora: The sectors we focus on are emerging themes such as e-mobility, renewable energy, digitalization, China +1/PLI, financialization of savings and tripling India’s GDP per capita compared to the current rate of $2,000. Our goal is to identify companies that would make the most of these themes. The e-mobility theme would benefit certain stocks in the automotive sector, the China+1 theme would benefit stocks in the pharmaceuticals industry, specialty chemicals and steel, among others. The LIP program would benefit both MSMEs and large players.
BT: What should be the right asset allocation strategy today?
Jaspreet Singh Arora: The overall asset allocation can best be discussed with one’s financial advisor. In equities, we recommend investing at least 50% now and the balance staggered over the next 3-6 months.
BT: Most IT stocks have eroded investor wealth in the current calendar year. What factors have dampened sentiment and do you see a buying opportunity in the sector?
Jaspreet Singh Arora: We are positive about the IT sector as demand visibility is robust for the next 1-2 years. Much of FII’s sales were supported by two sectors – IT and Financial Services which contributed 93% of the sale. The sale of FII within IT was primarily driven by high valuation, sector rotation, attrition issues and recent US recession concerns. We feel that even if a recession does occur, it will be mild and short-lived.
Commentary on the TCS Q4 results indicates good visibility on the pipeline over the next few months and they have not witnessed any budget cuts or postponement of customer spending, although customers are vigilant and cautious. Thus, it can be considered that to date there has been no sign of reduction in expenditure. We believe organizations today understand the importance and role of technology for survival and growth unlike previous cycles where technology was much more discretionary. Thus, the pressure is likely to continue for some time. We prefer large cap IT companies over mid cap companies due to valuations.
BT: The BSE Metal index has also lost more than 16% since the start of the year. How do you see the sector evolving?
Jaspreet Singh Arora: We have a neutral view of the entire metals sector. On a relative basis, we prefer aluminum and steel to other metals. We are selectively positive on aluminum in the metals sector as acceptance of aluminum is very high in high growth new era sectors such as electric vehicles and solar energy. Globally, aluminum still remains under tight supply. The recent imposition of export duties on steel, when revoked, will boost revenues and exports. This will also benefit domestic producers after the crackdown on production in China and with the world seeing India as an alternative supplier to China.
BT: The energy and auto sectors outperformed other major indices. What are the factors in favor of these sectors?
Jaspreet Singh Arora: In the automotive sector, the cooling of metal prices from their highs will help improve margins going forward. New model launches getting good response and volume recovery are the main reasons for the rally in the automotive sector. We prefer auto accessories to OEMs due to higher earnings growth. Moreover, the competitive intensity would be high for OEMs in the years to come. Therefore, the automotive auxiliary sector is considered a better bet.
We’ve seen 2022 investments shift more into pockets of defensive stocks and stocks that could add value. Interestingly, electric utilities are one such sector. This sector could remain outperforming amid short-term volatility supported by rising interest rates, geopolitical events and oil continuing to stay above $100.