‘RBI will cut rates only after the Fed; IT good for long-term investors’

Edited excerpts:

The Fed maintained a pause on rate hikes but signalled a strong possibility of one more hike this year. How could it impact the market? Can the RBI also follow suit?

The market has built in the possibility of one more 25bps rate hike by the US Fed this year and expects it to take a pause from thereon with the likelihood of a rate cut somewhere in the middle of CY24 (calendar year 2024). 

However, any larger quantum of rate hike or prolonged hawkishness could impact the market. 

From the domestic point of view, it is very likely that the RBI will keep interest rates unchanged in CY23. 

The next rate action could be a cut, initiated by the US growth slowdown in Q4FY24. However, a rate cut could occur only in 2024 if the global economy weakens. 

Further, it is very likely that the RBI will cut rates only after the US Federal Reserve, since the domestic economic growth may weaken but not substantially to warrant rate cuts before.

What does the medium-term outlook look like for the domestic market? We have several State elections, followed by a general election next year. How can they impact market sentiment?

We have three important states going into an election in November-December 2023 viz MP, Rajasthan and Telangana – the outcome of which would have a strong bearing on the sentiments going into the general elections next year. 

Further, the quantum of freebies announced by the government in the run-up to the election like the recent one of the ₹200 cut in the LPG cylinder, would also impact the market sentiments. 

However, purely on a historical data basis, since the last five elections, it has been observed that the market has rallied at least 10 per cent during the six months prior to the election. 

Thus, if we go by this trend, the medium-term outlook is positive and the market might witness a good momentum ahead of this key event.

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What are the sectors you are positive about at this juncture? Where do we need to look at other than financial, auto and probably realty?

Apart from financials, auto and realty, we are positive on capex (industrials, cap goods, infra, Cement), consumption (both discretionary and non-discretionary), hotels, select pharma and healthcare. 

Hotels and hospitals have just entered an upcyle which along with a healthier balance sheet would drive sustainable growth. 

On the other hand, private capex has started recovering after more than a decade and given the strong government intent along with various supportive initiatives and policy changes, it has propelled the order book of the cap goods, engineering and infra companies even further. 

Thus they enjoy strong revenue visibility but execution could be a challenge. 

Consumer companies are likely to benefit from a recovery in demand along with softer inflationary pressure

Is it time to buy IT stocks?

Given the mounting global uncertainties, the clients are likely to face further delay in deal announcement. 

Overall the weakness in demand could continue in the second half of the current financial year (H2FY24) with a significant hit on discretionary spending. 

Clients continue to focus on cost and efficiency-driven projects while keeping the non-critical projects on hold. 

Though the deal pipeline remains healthy, the weak macro will continue to impact revenue conversions, thereby creating near-term pressure on revenues. 

However, valuations are attractive after sharp underperformance hence long-term investors can gradually accumulate in a staggered manner.

What is the road ahead of PSU bank stocks? Is there more steam left in them?

We are seeing buoyancy in PSU banks on the back of improving earnings visibility enabling them to deliver nearly one per cent RoA (return on assets) on a sustainable basis. 

We estimate earnings traction aided by improved loan growth, controlled credit costs and steady margins. 

Further, the earnings quality has also improved sharply with a much lower contribution from treasury gains. 

We believe that consistent performance on earnings can result in further re-rating of PSU Banks as valuations still appear attractive.

What should be the strategy for playing mid and small-caps now, given they have risen strongly this year?

Though midcaps and small-caps have seen a sharp run-up, one can still find opportunities in select pockets. 

One needs to apply a bottom-up approach and build a portfolio well diversified across sectors. 

With the robust domestic macros, the earnings visibility clearly remains strong. 

If the RBI takes a rate cut next year, it would further push their profitability, as they bear the maximum brunt of high interest rates.

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Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.

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Updated: 30 Sep 2023, 09:16 AM IST