The world is dynamic, and investment preference for sectors keep changing, according to Sunil Singhania, founder, Abakkus Asset Manager, LLP. Based on the current situation, he prefers banks, IT, and the pharma sector.
In his investment approach, he focuses on any sector with growing consumption possibilities and emphasises ‘value consumption’. He backs his sector preference with the factors affecting the current economic scenario, which is elevated inflation, and rising interest rates globally and locally. While globally, the central banks are grappling with the challenge of keeping inflation under control, and increasing interest rates, the Reserve Bank of India (RBI) in April 2023 surprised speculators with its decision to put a pause on interest rate hikes.
Singhania says that to tackle the inflationary challenges, “central banks all over the world resorted to tight monetary policy.” According to him, while the market was expecting a rate hike of 25 basis points (bps), the pause on the rate hike by the RBI was a pragmatic step, and globally some rate cuts will start to happen in the second half of 2023.
Amid this situation where the rising interest rates were impacting the household and the mortgage segment negatively, the central bank decided to put a pause on the rate hike. He observes that yields have fallen lately as an aftereffect of the step taken. The effects of this can be observed in the banking, auto, and real estate sector, which are now responding positively.
So, Are These Sectors A Good Buy Now?
Says Singhania, “The world is very dynamic, and I don’t want to get bogged down with the sectors.” He adds that there could be the best company that can perform well in a not-so-great sector and the worst company that may falter in a very good sector.
Banking Sector: On the question of asking his reasons for preference for the banking sectors, he says, all sectors will continue to be there, but based on growth as of now, banking is good on price to earnings (P/E) multiple basis. “The sector is still quite good. The companies are not very expensive,” he says.
The banking sector is standing out in terms of earnings. For the quarter ended March 2023, the growth of corporate India is to be driven by banks. It is because of the due diligence, in terms of fresh assets and non-performing assets, banks have been taking care of for over the last 4-5 years, he says.
He adds: “There were views that the March quarter number would be the peak in terms of the net interest margin (NIM), however, with this pause now, the view is that the kind of NIMs the banks are making might sustain as we move forward.”
Also, if the interest rates do not increase, or, starts to decline, the possibility of credit demand may improve. From both the credit demand side and the spread, this should be quite possible for the entire lending space, the banks as well as the banking and financial services, says Singhania.
He says there has been a time when the public sector banks were leading a non-existence kind of valuation largely because of the fear of non-performing assets (NPAs) coming back. But the results have improved in the last 6-8 quarters, and spreads net of credit cost have been pretty decent. Also, quite a few public sector banks have done much better. Even among public sector banks, 2-3 banks have great brands and are comparable to the private sector banks in terms of maintaining their CASA ratio. At the same time, there are banks that are struggling to achieve these deposits. So, instead of focusing on a public v/s private sector bank, one should focus on the brands as the opportunity exists in both segments.
IT Sector: On IT sector inclination, Singhania opines that this is one sector where India is globally competitive, but because of the user segment, which is predominantly the US, it experienced headwinds. Over-hiring and the recent layoffs in the industry are not new anymore. “But we are not looking at a de-growth in the sector. The correction has happened in terms of time correction and price correction, and companies are by and large available at sub 15-20 P/E multiple,” he says.
“If the world revives, which is in my view, will be in the second half of 2023, you will see the global economy also reviving and all the headwinds becoming tailwinds, including, over-inflation, over-interest rate, China coming back on steam, and even growth in the global economy which was looking like a recessionary kind of environment. Also, one thing we need to remember is that in IT companies, the profits are completely cash conversions,” says Singhania.
Pharma Sector: On his third favourite sector, he states that in the pharma sector, very good companies are available at sub 20 P/E multiple, after a long time.
He prefers buying domestic pharma companies. He says, “This is one space where the demand is to be constantly there, and after a long time, the headwinds of input costs being pretty high are now turning into tailwinds and in some sectors, even the energy costs has started to reduce quite significantly which can again become a tailwind.”
