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    India is in the midst of a major infrastructure upgrade: Shiv Sehgal

    Synopsis

    ​The greater the lag effects on the US economy of the Fed's restrictive policy and henceforth, the more aggressive Fed's eventual policy shift towards easing which is what markets are pricing in at the moment.

    Shiv Sehgal (1)Agencies
    In India, I am seeing a similar trend in terms of the laggards that were last year have turned very positive. We have autos, FMGG industrials which in 2022 were doing well, but in 2023 are even doing better.
    "It seems to me that the bond market is telling us that the two-year yields have made an important significant top in March. If you look at the history, predominantly we have looked at the two-year yields as long as they remain below the Fed fund's rate," says Shiv Sehgal, Nuvama Capital Markets.

    I want to understand the structure of the emerging market and India in particular. Given the way flows have turned very conducive, rate hike talk no longer is impacting global sentiment. It is more to do with debt ceiling. How are you looking at the way Indian markets are set up right now?
    I think we are at a very precarious time and lot of interesting stuff going on. If you just look back two months back in March, we had the US banking scare. There was a mounting stress from the Financial Times that we keep hearing in the commercial real estate property market in the US. There is definitely a lot of growing evidence of credit scarcity. But at the same time, we have NASDAQ making all-time highs or at least back to almost April highs of last year. So there is a conflict going on between investor fears and uncertainty regarding the US economy which the bond market is relating to and if you look at the two-year Treasury yields, we peaked at almost like 5% in March 8. Then we hit a low of almost 3.8% at the peak of the regional banking crisis in the US.

    If you look at where we are today, if I look at US two-year yields we are around 4.3%. So I guess what the market is suggesting is the Fed is likely to pause from further increases in policy rate. If I look at the Fed fund futures that market is suggesting almost a 52% probability of a November rate cut of 25 bps, and another 50% probability of another 25 bps cut by December which is actually helping the emerging markets and we are seeing foreigners turn buyers in Indian markets for the last almost four or five weeks.

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    It seems to me that the bond market is telling us that the two-year yields have made an important significant top in March. If you look at the history, predominantly we have looked at the two-year yields as long as they remain below the Fed fund's rate.

    The greater the lag effects on the US economy of the Fed's restrictive policy and henceforth, the more aggressive Fed's eventual policy shift towards easing which is what markets are pricing in at the moment.

    It is also worth noting to indicate that from a macroeconomic point of view all the leading economic indicators have been declining in the US. Actually, the Conference Board's LEI has now declined for 13 consecutive months.

    The last time we looked at such bearish indicators was almost at the peak of the global financial crisis in March 2009 so there is a tussle where bad news is actually good news because markets are extrapolating that the Fed will pause, liquidity will come back into the system but at the same time the narrative in emerging markets is a lot more positive.

    But if you look at the hedge fund community from a developed market perspective, it is very interesting to note that the S&P 500 net speculative positioning indicates massive shorts in the system going into the summer debt ceiling event.

    Now, the debt ceiling event, is a known unknown. The market is aware of the event but we are unsure of its outcome. If the US Congress fails to reach a consensus on the debt limit, the event will likely cause more volatility soon.
    Historically, we have seen alarming statements from US Treasury about an impending default which is all part of the political posturing and the limit is usually raised in the 11th hour. Historically, we have seen always that but let us see how it plays out.

    For me, what is more critical is that in the last two months, we have seen the G5 central banks' liquidity picking up so liquidity is projected to go up in the future months especially in the second half of this year as well. To me, the pain trade from a markets perspective remains up. My view is that we muddle through the summer noise of the debt ceiling and the uptrend continues, and the biggest beneficiary, of course, will be emerging markets.

    And that, as you just rightly mentioned, we are seeing that much extrapolate that in India as well where the midcap and the small cap space in the last two months has come back very strongly.


    If one were to take a one to two year kind of perspective what kind of structuring would you do to your portfolio given the fact that when rates usually peak out, there is a good period of outperformance from midcap and small-cap. At the same time, earnings quality of the large-cap universe is also not that bad. Barring a few Infy like names many have actually done very well better than what Street was actually estimating on earnings front. How would you structure your portfolio to play 12 to 24 months?
    The results this year have been pretty much in line and encouraging. Our key takeaways have been that the domestic demand in India seems to be far better than the export demand. I think this trend will likely continue into the foreseeable future.

    The China reopening trade has not really played out from emerging market perspective as people were anticipating in January 2023. It has been a stop and start situation for China and as a result of which we are continuing to see a lot more impetus and limelight given to India.

    And there is a genuine structural shift in foreign investors in terms of India. I think the margin headwinds are receding and in fact, tailwinds are coming through for India. For FY24, as well as for the next 18 to 24 months, I think the margins could see some upside, given that commodity prices are remaining soft, given that the China reopening has kind of been a soft patch as well.

    In terms of financial earnings, we could see some moderation as margins. However, if you look at most of the commentary coming from both private and PSU banks, they seem very confident on credit demand which augurs very well for rural India as well given monsoon season is just around us. And I think the biggest beneficiary has been the industrial companies continuing to post strong quarter with robust order inflow growth. So overall, earnings season seems to be that we are favouring the domestic demand led companies and sectors, while exporters I think from a global perspective will continue to face headwinds at least for the next one or two quarters.

    But I see that emerging and changing as we enter the last leg of financial 24. In terms of sectors, you rightly said, apart from Infy like the IT space in India has been consolidating for almost a couple of months. We are seeing momentum, flows and liquidity coming back into that sector.

    The midcap space has done really well. And I do believe that even real estate in my mind cannot be ignored in India. Despite the increase in interest rates, I remain of the view that it would be a mistake to be underweight in this sector.
    And I remain very bullish from the domestic demand led impetus that we are seeing. Now, one more key takeaway for me is what we are seeing in the infrastructure spend.

    I think we are probably going to see a lot more capex spend by the government and that is percolating down into private companies as well. And that to me remains a very big beneficiary over the next 18-24 months.


    What universe in the market are you most bullish on compared on parameters like risk-reward valuations versus the earnings growth they offer?
    India is in the midst of a major infrastructure upgrade. The Indian government intends to invest almost 1.4 trillion in infrastructure over the next five years. I think any ancillary that is a derivative of the infrastructure spend, whether it is railways, defence, the cement, the domestic auto demand, all these sectors will do very well. Another theme that is kind of emerging in this year is the fact that if you look at the developed markets, we had NASDAQ, tech, growth, all underperforming a lot in 2022. And the flip side of that, as this year in 2023 has emerged, we are seeing all these laggards turn leaders.

    In India, I am seeing a similar trend in terms of the laggards that were last year have turned very positive. We have autos, FMGG industrials which in 2022 were doing well, but in 2023 are even doing better.

    Whereas on the flip side, we are seeing the large outperformance of PSU Bank, the power sector, kind of take a backseat in India at the moment. But I think overall, as you rightly said, I think India is an alpha market for me in FY24. I think some of the gems that we are talking about and finding in the midcap space and small cap space which has probably been a consolidation phase since the peak on Jan 2018 that is the space that I am the most excited about and I think that will be multi-baggers in India in the next possible future.




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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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