Daily Voice | This CIO stays cautious while taking positions in IT space as risks of earnings downgrade loom

If the US inflation which is around 9 percent remains sticky even at a slightly lower level, it might be difficult for Fed not to take more rate hikes. Hence it is difficult to foresee any immediate change in Fed stance.

August 03, 2022 / 08:29 AM IST
Rushabh Sheth of Karma Capital Advisors

Rushabh Sheth of Karma Capital Advisors

Rushabh Sheth of Karma Capital Advisors believes as India remains largely a domestically driven economy, it should cushion the impact of any recession in the US and other countries.

The Indian consumer and corporate sector are in good shape which should continue to drive the economy along with the various government infrastructure and reform programs, says the co-CIO and co-founder.

Seasoned for over two decades in money management, primarily in listed equities, Sheth says that Karma Capital would remain cautious while taking positions in the IT space as even though valuations have become more reasonable, there are risks relating to cuts in earnings in the coming quarters, which can keep the sector rangebound.

Here's an excerpt from a discussion Sheth had with Moneyconotrol.

What are your thoughts on the Fed's July policy meeting? Do you think the Fed will consider a change in stance and take a pause at the next review?

The 75 bps rate hike by the Fed was as anticipated by the markets. Even after this Fed hike the real interest rates in US remain deeply negative. If the US inflation which is around 9 percent remains sticky even at a slightly lower level, it might be difficult for Fed not to take more rate hikes. Hence it is difficult to foresee any immediate change in Fed stance.

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Do you expect the RBI to turn dovish in its August policy review, especially after the fall in commodities prices? What kind of rate hike do you see?

The Reserve Bank of India might continue to raise the rates in its August meeting. The commodity prices have cooled off recently, reducing the inflationary pressure. However, it has to be seen if the commodity prices continue to remain benign for inflation to cool off materially.

It is difficult to predict if the RBI will become more dovish just because of some reduction in commodity prices. The RBI will be more focused on the long-term trajectory of inflation and more importantly inflationary expectations in the economy.

The market has taken a big leap after the Fed policy meeting. Do you think the market has priced in all negatives, including inflation and policy tightening fears, and is marching towards its previous highs with belief that the worst seems to be over now?

It is not possible to predict markets. Markets have rallied recently as the central banks across the world have moved decisively to curb inflation. It is still not very clear if the current central bank action is enough or more rate hikes would be required to keep inflation structurally lower.

Economic growth across the world will slow down due to higher rates and some economies might be pushed into a recession. Hence it is difficult to say if the worst is behind us in terms of the markets.

With the market recovery, what are the themes to bet on and why?

We have more a medium to long-term view of the markets. The current rate hikes will impact growth in the near term. However long-term growth prospects for India look significantly better than most large economies.

We think that as India transitions from a $2,100 per capita to say $3,000 or $4,000 per capita country over the next 3-5 years the incremental spending patterns will see quantum change.

Hence the sectors that will do well over the next 3 to 5 years might be very different than those that have done well in the past 5 years.

Do you expect a major impact on India's growth story if there is a recession in the US and Europe in the coming future?

Recession in large, developed markets like US and Europe will surely have impact on India economy especially sectors like IT that are closely linked to growth in these economies. India, however, remains largely a domestically driven economy which should cushion the impact of any recession in US and other countries.

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The Indian consumer and corporate sector are in good shape which should continue to drive the economy along with the various government infrastructure and reform programmes.

Do you think it is the right time to start taking positions in the IT space now?

The US is the largest market for majority of the IT firms. Hence, a slowdown or recession in the US will have a direct adverse impact on most IT firms as most corporates will curtail their spending including IT spends. Even though valuations have become more reasonable, there are risks relating to cuts in earnings in coming quarters which can keep the sector range bound.

Hence, we would remain cautious when it comes to taking positions. Thus, we need to take a slightly long term view in this sector and be prepared that many of these face risks of being rangebound or even absolute correction in the near to medium term.

There are some companies who are doing niche and differentiated work and therefore will be relatively less impacted. These companies may continue to deliver strong growth and provide good returns to shareholders if they are attractively valued.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar
first published: Aug 3, 2022 08:29 am
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