What seems to be the mood of the market? It should have been jubilating that Brent crude is below $100. But that doesn’t seem to be the case.
Yes, I agree. The oil prices were the last man standing as far as the commodity prices are concerned because the kind of the cool off that we have seen in all the commodities was missing in the oil prices but that seems to be cracking now.
So yes, it is very positive for the Indian economy and my sense is that the Indian markets will take cognisance of that and today the mood might be a little bit sober because of the global markets. Last night,the US markets were very positive but ended a bit negative because of recession fears and so on and so forth. After many days, yesterday we saw some decent amount of selling numbers from the foreign institutional investors. That might have played on the minds of the investors or traders but my sense is this might be short lived and we should see the mood getting positive sooner than later.
We saw India’s inflation number coming in at 7.01% versus 7.10% that the Street was estimating. Tonight the US CPI would be coming in. The entire world expects slight uptick but do you think yesterday’s inflation number here in India and today’s US inflation reading broadly could be the peak and from here on inflation will start to moderate?
I definitely would like to believe so because all these numbers that we are seeing are probably from the data points of a couple of months back or at least a quarter back or may be six months back also.
In the last two to three weeks, we have seen a dramatic change when it comes to most of the commodity prices – be it ferrous metals, non-ferrous metals across the board and even precious metals. In fact even a lot of softer commodities the agri commodities have also today all of these prices are pre-Ukraine war prices so what was existing the prices which were in January-February those prices are back after almost six months.
So clearly the worst of the inflation seems to be behind us and the last man standing was the oil prices, where also we are seeing a decent amount of crack. Thereafter, in a good time frame we are seeing oil probably going decisively below $100. The worst of the inflation seems to be behind us, and that was one of the very big headwinds across the global economies and definitely for the Indian economy also. That haziness is probably out of the way.
So how are you playing this topping out of commodity point or angle in your portfolio be it agro commodities so consumer stocks some of them are excited or even industrial commodities the users auto, auto ancillary, capital goods many others do they find part of your portfolio?
We strongly believe that the Indian economy is actually going to do very well. Generally, the backbone of any economy is the financial services. We believe that the banking and the financial services do very well and within that, private sector banking has been doing very well.
In fact, now the credit growth numbers have also picked up quite a bit. They are in almost double digits for many weeks now, almost at 12%-13%. Clearly, the profitability of all the banks should improve now that they have already cleaned up their balance sheets. Their asset quality is much sturdier and so the credit cost will also remain under control. Their NIIs will increase as credit growth increases. We believe private sector banks should do very well as the economy picks up.
The second big sector which benefits a lot is consumer discretionaries like auto. Lower commodity prices, higher disposable income as wage growth has been one of the highest in the last so many years, means more money to spend in this sector. In the BSE 500 companies, the wage growth or the salary expenses have increased almost to 13.5-14% for the financial year 2022. If you take only the manufacturing companies, it is almost up by almost 14.5-15%.
This kind of higher income level in the hands of the consumers should also help in terms of the spending. So, autos should also do very well. We also believe that because of the supply chain diversification that we are seeing in the world and because of this government PLI schemes and all of that, the export shares should also pick up very well. Within exports, there are certain sectors where India has certain strengths like chemicals, pharmaceuticals, engineering and electronics. Some of these sectors should do very well. We are positioning our portfolios in these few sectors at this point in time.
How is the earnings picture? Looking at your portfolio for the next three to four years, are you confident that the portfolio level earnings could be 15-18% or is there a need to rework that on the lower side?
This question was probably really worrying us about three to four weeks back when the commodity prices were very high. Clearly that would have impacted our earnings side, profitability and all of that. There also could have been demand destructions, even the top line could have gone for a toss; but now that the commodity prices have cooled off so much – copper has come down from almost 10,000 to under 7,500 aluminium is at 2500, steel has corrected by 20% plus.
All of this really gives us comfort that there will be no demand destruction, rather the trajectory as far as the Indian economy growth is concerned should continue and with this kind of raw material prices, companies should be able to maintain their profitability. We believe 18% to 20% compounded growth over the next two to three years is a high probability.
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