“I think the IT services should continue to do well and in the second half of the year, we should see a good recovery as the global economy heaves a sigh of relief that we are not getting into a deep recession. That should be a positive for our IT service companies and I would be a buyer. I am holding some positions, and I would add to those with this kind of outlook on the economic side,” says independent market expert Ajay Bagga. Edited excerpts:
We heard a lot of Fed members this week and the consensus seemed to be that there are more rate hikes coming. The terminal rate needs to be higher than what the Street is pencilling in and perhaps a 50 basis point hike in the next cycle. Are you of a similar view as well? Is that what we are likely to see and is the market pricing it correctly?
Market was actually pricing in a more Goldilocks kind of scenario where inflation smoothly trends down, the economy stays on an even keel, there is no landing, no hard or soft, no landing at all, and the economy keeps flying ahead So, S&P 500 went up 8% in January based on this Goldilocks kind of a scenario. What has happened subsequently is three-four very major data points – one is the very strong US jobs growth, nearly three times at 500,000 plus jobs are coming in. The unemployment numbers are coming down to 1959 levels, so nearly a 60-year low for unemployment. Third was the CPI, though declining but declining less and coming in higher than estimates. The PPI, the producer price index, came little above estimates and the fifth major thing was the very strong comeback in the US retail sales, nearly 3% year-on-year growth. If you see out of say a 100 trillion global economy, the US consumer is about a 15 trillion strong cohort and if that is growing so fast, that clearly showed the central bankers that still the economy is not reflecting the 282 rate hikes that all global central bankers did last year and bringing inflation down to targets might require more rate hikes for longer. So smooth economies but confused markets is how I would summarise that.
We heard a lot of Fed members this week and the consensus seemed to be that there are more rate hikes coming. The terminal rate needs to be higher than what the Street is pencilling in and perhaps a 50 basis point hike in the next cycle. Are you of a similar view as well? Is that what we are likely to see and is the market pricing it correctly?
Market was actually pricing in a more Goldilocks kind of scenario where inflation smoothly trends down, the economy stays on an even keel, there is no landing, no hard or soft, no landing at all, and the economy keeps flying ahead So, S&P 500 went up 8% in January based on this Goldilocks kind of a scenario. What has happened subsequently is three-four very major data points – one is the very strong US jobs growth, nearly three times at 500,000 plus jobs are coming in. The unemployment numbers are coming down to 1959 levels, so nearly a 60-year low for unemployment. Third was the CPI, though declining but declining less and coming in higher than estimates. The PPI, the producer price index, came little above estimates and the fifth major thing was the very strong comeback in the US retail sales, nearly 3% year-on-year growth. If you see out of say a 100 trillion global economy, the US consumer is about a 15 trillion strong cohort and if that is growing so fast, that clearly showed the central bankers that still the economy is not reflecting the 282 rate hikes that all global central bankers did last year and bringing inflation down to targets might require more rate hikes for longer. So smooth economies but confused markets is how I would summarise that.
Has any sector become a buy after this earnings season or is there any sector in which you think one should book profits?
Banking, and financials stayed on top and that was good. Cement is emerging as a very interesting sector and the price hikes will help the bottom line a lot. Their input costs have been going down and cement is coming into its zone after a very long gap. Industrials are doing very well given the infrastructure thrust. One little contrarian or a little ahead-of-the-curve call would be metals. We have seen really atrocious numbers. As China recovers and we see the Chinese economic recovery gaining traction around June, all of a sudden you will see price action coming back. So I would take some positions in metals in anticipation of a Chinese recovery; the profit numbers were very poor, margins fell down because of pricing going off, I think global pricing will come back to metals and that will help our metal producers as well.
After the earning season, while we have not seen big upgrades, the sentiment seems to have turned positive in the IT sector. The valuation is something which is providing comfort as well plus the outlook is not as doomed as the Street was expecting. What is your take with respect to IT; should one look at buying perhaps any of the largecap or midcap names?
We should look at largecaps. We have seen the attrition problem going away still, the order flow has been muted but a few big orders are there in a couple of companies. This year will be challenging but that is more on the hardware side and the product side. I think the IT services should continue to do well and in the second half of the year we should see a good recovery as the global economy heaves a sigh of relief that we are not getting into a deep recession. That should be a positive for our IT service companies and I would be a buyer. I am holding some positions, and I would add to those with this kind of outlook on the economic side.
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