Is There a Silver Lining in the Falling Stock Market? Jaspreet Singh Arora weighs in

At a time when most stocks are down year-to-date (YTD), Chief Investment Officer, Research & Ranking Jaspreet Singh Arora sees a few factors in Dalal Street’s favor. In an interaction with Business Today, Arora also shared his top themes, investment strategy and views on the buying opportunities available in the down market. Edited excerpts:

BT: With the ongoing uncertainties in the stock market in the form of rising inflation, strong FII outflows, geopolitical crisis and falling rupee, do you see a silver lining?

Jaspreet Singh Arora: Improved corporate health, higher credit growth coupled with the government’s infrastructure focus and increasing investment in new-age sectors make India resilient. India saw its highest annual FDI inflow of US$84 billion in FY2021-22 and ranks among the top 10 recipients of FDI globally. For now, India remains an attractive destination and is among the top 5 countries in terms of GDP. India is one of the few emerging markets with sound fundamentals from both a short and long-term perspective and is recognized as the fastest growing major economy in FY23 with average GDP growth expectations of 7.4 percent (IMF global GDP estimate for FY2019). Fiscal year 22 is 3.6 percent). percent, China 4.4 percent).

The government’s consumption tax cuts, export tariff hikes and export bans, aided by normal monsoon expectations, have helped to some extent control inflation, while the falling rupee benefits export-oriented sectors such as IT, pharmaceuticals and chemicals. Our foreign exchange reserves are perfectly adequate to avert a currency crisis, given the external shocks other countries are exposed to. The economy has faced a number of challenges but is strongly positioned to navigate fairly well.

BT: How do you see the further movement of the stock market in the current financial year?

Jaspreet Singh Arora: Corporate earnings should remain healthy despite near-term inflation and recession concerns in the US. Nifty’s earnings per share (EPS) are expected to grow 18 percent in FY23 and 13 to 15 percent in FY24. In the near term, a period of consolidation or time correction amidst volatility is expected before we begin any major moves.

BT: What is your advice to investors suffering heavy losses and those sitting on the sidelines?

Jaspreet Singh Arora: Up to 20 percent of NSE 500 stocks are down between 10 and 20 percent, while a staggering 65 percent of NSE 500 stocks are down between 20 and 50 percent from their 52-week high. For those losing heavily, one should assess the fundamentals and growth potential of their existing portfolio stocks, and we recommend exiting stocks where earnings will face short-term headwinds or where fundamentals are not in the best shape, and switching to quality stocks that are have demonstrated robust revenue and profitability growth while maintaining return ratios and are expected to continue earnings growth momentum over the next 1-2 years. For those sitting on the sidelines, the investment can be staggered over the next 3-4 months.

BT: Can you shed some light on your investment strategy?

Jaspreet Singh Arora: In terms of our strategy, we have a long-term focus that is fundamentally driven and we aim to generate alpha using Nifty as a benchmark. We have a 10 core rule strategy for both qualitative and quantitative measures to shortlist stocks. Our portfolios are divided into three categories – structural growth with a 3-5 year view, momentum stocks with a 1-3 year view and special opportunities with a 1-year view.

While current valuations appear attractive, we typically recommend investing at least 50 percent of your investable body now and staggering the balance over the next 3-6 months. Since October 2021, the mid-cap and small-cap indices are down 17 percent and 28 percent, respectively, compared to the 14 percent that large caps have given up. We currently favor mid-caps and select large-caps with strong fundamentals, while keeping an eye on prudent asset allocation and volatility risks.

BT: Which themes do you think will clash in the next rally?

Jaspreet Singh Arora: The sectors we are focusing on are emerging themes such as e-mobility, renewable energy, digital, China+1/PLI, financialization of savings and India’s GDP per capita tripling from its current $2,000. Our goal is to identify companies that would best benefit from these issues. The e-mobility theme would benefit select stocks in the auto sector, while the China+1 theme would benefit pharmaceuticals, specialty chemicals and steel stocks, among others. The PLI system would benefit both MSMEs and larger players.

BT: What should be the right asset allocation strategy right now?

Jaspreet Singh Arora: The overall asset allocation is best discussed with his financial adviser. For stocks, we recommend investing at least 50 percent now and staggering the balance over the next 3-6 months.

BT: Most IT stocks have eroded investor wealth in the current calendar year. What factors have dampened sentiment and do you see bargain buying opportunities in the industry?

Jaspreet Singh Arora: We are bullish on the IT sector as demand visibility is robust for the next 1-2 years. A large brunt of the FII sell-off was borne by two sectors – IT and financial services, which accounted for 93 percent of the sell-off. The FII sell-off in IT was mainly due to rich valuations, sector rotation, attrition issues and recent US recession concerns. We sense that even if there is a recession, it will be mild and short-lived.

TCS’ Q4 earnings comment indicates good pipeline visibility over the next few months and they have not experienced any budget cuts or shifts in customer spending, although customers are vigilant and cautious. So it’s safe to assume there are no signs of spending cuts so far. We believe organizations today understand the importance and role of technology in survival and growth, in contrast to previous cycles where technology was much more discretionary. The pressure should therefore continue for a while. Based on valuations, we favor IT large caps over mid caps.

BT: The BSE metals index is also down over 16 percent year-to-date. How do you see the future of the industry?

Jaspreet Singh Arora: We have a neutral view of the entire metal industry. Relatively speaking, we prefer aluminum and steel to other metals. We are selectively positive on aluminum in the metals sector as acceptance of aluminum is very high in high growth new age sectors such as electric vehicles and solar energy. However, aluminum remains in short supply worldwide. The recent imposition of export tariffs on steel will boost profits and exports once lifted. It will also benefit domestic manufacturers after production in China shuts down and the world looks to India as an alternative supplier to China.

BT: Energy and auto sectors have outperformed other major indices. What factors speak in favor of these sectors?

Jaspreet Singh Arora: As for the auto sector, the cooling of metal prices from their highs will help improve margins going forward. The launch of new models, which are met with good reactions, and the increase in volume are the main reasons driving the rally in the auto sector. We favor automotive ancillaries over OEMs due to higher earnings growth. In addition, the intensity of competition for OEMs would be high in the coming years. Therefore, the auto parts sector is seen as a better choice.

We saw investment move more towards defensive stocks and stocks that could add value in 2022. Interestingly, utilities are one such sector. This sector could remain an outperformer amid short-term volatility supported by rising interest rates, geopolitical events and oil remaining above $100.

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