“We saw people moving money out of markets like India and deploying it in markets like China. Having said that, we also see that the domestic flows remain fairly strong and that is why we have seen that despite the market falling, the fall has not been very sharp. It has been a much more orderly fall and whenever the uptick happens, it happens very sharply,” says Jitendra Arora, Executive VP, ICICI Prudential Life
How are you reading into the market construct right now? It is volatile, but on days it does not go anywhere, but still given the FIIs selling that one has seen month to date and from the start of the year to now, where do you believe the market is headed next?
There are a few forces which are driving the market as of now. The first one being obviously the market’s understanding of how much central banks are likely to raise in terms of rates both locally as well as globally. We started the year assuming that the Fed is perhaps very close to their rate hikes and there will be another 25 bps more to go.
But the incoming US data seems to be stronger than what the market expected on both employment as well as the way the economy is holding up, people have started re-pricing that number. Also the market was expecting some kind of rate cuts happening in the later part of the calendar year from the Fed which now have more or less gone out of the window.
So, because of that, we are seeing that equity markets have had a very volatile period and we expect some of this volatility to continue. On top of that, India has been a peculiar case where we have seen a lot of FII outflows happening in the month of January and February, whereas we had seen that FIIs had turned buyers in domestic markets since July last calendar.
But that quickly changed as China looked to open up and people started to play some kind of recovery trade in China. We saw people moving money out of markets like India and deploying it in markets like China. Having said that, we also see that the domestic flows remain fairly strong and that is why we have seen that despite the market falling, the fall has not been very sharp. It has been a much more orderly fall and whenever the uptick happens, it happens very sharply.
That is why we are very sanguine in terms of our outlook on the market. We believe that we may have volatile markets, but we do not see a very sharp correction from here and as and when the Indian data keeps coming, seeing how the economy is holding up, how the profit growth is panning out, we should see a sideways to slightly upwards market towards the end of the calendar.
In terms of the slowness in activity whether it is on the retail side, whether it is on the new account openings on the mutual fund side, how are you looking into that? Do you think people are getting tired?
I would not say that because the SIP amounts are holding up very well for the mutual funds. The SIP flows were at an all-time high. At least investors seem to have matured a little bit wherein they have realised that volatility is a part of the market and they will have to take it in their stride without diverting from their long-term asset allocation or looking at deploying money at every level.
In terms of sector allocation, how would you look at it? The last couple of years was all about very high growth and de-leveraging. Global plays did well, e-commerce companies which were growing pretty strong did well. Do you think that time has come to move to slow and steady winners?
If you see what has been playing out for the last 12 months, CY22 was all about in some ways a value kind of play wherein the companies which had more steady cash flows along with reasonable valuations, they did very well in that period and some of the internet names, etc, or the fast growing companies which you mentioned earlier, they have seen reasonable correction.
We believe that that trade may continue to play out for some more, but we must remember that given the nature of these companies which remains very fast growth, either through price correction or time correction, the price becomes very attractive at one point in time. And at that point in time, your fund has to be positioned in them to take advantage of the fast growth that some of these companies may offer.
Are there any specific sectors or spaces that you would avoid now?
I would tend to avoid companies or spaces which do not have any triggers for the next two to four quarters. And as you mentioned, some of them may be in the sectors which we have discussed. So even though we like a lot of growth names, we realize that if the market or if the economy is likely to slow down, if there is going to be a constant fear about Fed rate hikes, and we do not see capital flows returning to India very quickly, they may continue to remain sideways.
A lot of these companies are PE owned, there is a constant supply pressure in the market with respect to the sellers. That is why we do not see that some of these companies can do very well in this environment. One may wait and watch before looking at these companies.
When we just talk about auto sales numbers, overall consumption, commentary regarding that, ex a real estate where commentary has been particularly strong or a hotel sector has been exceptionally strong, do you believe there is a significant slowdown in consumption which is visible now?
There is some slowdown. I would not call it a very significant slowdown because we must keep in mind that we are coming off some very strong growth quarters. And add to that the inflation situation domestically, which has been relatively higher, plus a slightly weak rural economy. We are seeing that there is some slowdown, but I would not read too much beyond that. And I expect that growth should pick up as we move towards the later half of this fiscal.
Across the board, the order inflows for a lot of capex related themes starting to pick up. Do you think that that is going to really translate into revenue growth as well as a pickup in overall margins?
So certainly revenue growth and margins, we must remember that some of these companies have shown hugely improved margins over the last four quarters because of the fact that commodities have cooled off. From here on, how much margin can be improved we will be watchful. But even if the margin improvement is not very strong, the revenue growth will be reasonably sharp and that should drive the early growth for a lot of capex related companies.