What do you make of power and capital goods stocks? Do you think it is a space which has done well and can continue to do well? Would you want to go with the capex plays?
Yes. Globally we will see a big capex cycle and that will not be the traditional kind of roads and bridges. I mean that will still be there for India in particular. But it will be more towards defence and renewables.
India along with other countries and companies will see this opportunity of trying to help alleviate the kind of supply risk that we have witnessed over the last few years. That is where the capex cycle will be and it will be about smart factories, smart offices. New companies will benefit from capital expenditure. Companies like ABB, Siemens would be jumping into this sector. That is why this capex cycle is slightly different in terms of some of the real winners over a longer period though the capex on roads and bridges will still be there.
The other industry that I will probably look at is the electronics industry where we have seen problems in China. Increasingly now, India will look to supply a lot of electronics, not just locally but globally also in the future.
Capital goods is a really big sector and there are two kinds of themes. One is capex but slightly different than the normal roads and bridges capex and two is the electronics industry.
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We have seen when the capital goods sector goes up, it is not only one sector that does well. Maybe a re-emergence of defence is but companies like ABB, Siemens are also doing well. Are these the traditional capital goods names that you would like to own?
In terms of the new cycle of capex, which will be in new areas for India, like semiconductors – the ABBs and Siemens of this world will also be looking at building those factories and are helping to build those factories. Of course, the ABBs and Siemens of the world will also do well in terms of defence as well.
So, we get the benefit of both defence spending and the new capex cycle looking at those industries which will deal with security risk going forward where the government will lend a hand with the capex cycle or companies will see the opportunity to start building factories and supply chain.
The two spaces which have underperformed in the last six months odd are IT and pharmaceuticals. The latter saw a longer stretch of underperformance. Have they come in the value zone yet? Can any of the IT or pharma names be bought again after the recent spate of selling?
Domestic pharma is an area we will be probably looking at because obviously we are not hostage to what happens overseas and any fallout from the downturn there. But for IT, it is kind of the same. Its valuations are not compelling enough, given what we are expecting to happen to the global economy. I will wait for the Fed rate hikes to go on hold, befire looking at tech again.
When I say tech, that is probably when the tech in the US will start to hold steady and that will give some breathing space to the IT sector here because one cannot walk away from the negative sentiment towards technology globally and that is going to be hurt by a slowdown in the global economy.
We are going to see that figures of the margins are going to remain under pressure. I do not think that some of the issues that the IT sector has been going through will go away in the very short term. There are better sectors to be in for growth than these two right at this moment.
Everybody is puzzled why Indian markets are so expensive. How should one look from here on? If the US starts doing well, do you think India can actually consolidate because it has not really fallen?
The way I see it is that as soon as the global central banks got involved as investors love to see where the growth is, obviously India stood out way above everyone else. But if you are looking for a global economic recovery, then you are going to be looking at some of those exporting countries.
We are going to see value in South Korea, maybe Taiwan and maybe even China if it can resolve some of its problems. So there will be cheaper options but India will continue to get the flows through despite the high valuations given that our growth is going to remain strong for many years ahead.
So I am less worried about that kind of relative performance against some of the markets going forward. We might not perform as well but we will still make strong gains over the next two to three years. That is not what we are really kind of concerned about from an India perspective.
is up about 20% since the numbers came out much higher than estimates. It was the case with a lot of private banking names as well but do you think the ownership factor is giving more delta into these PSU names?
Yes, of course. PSU names have been an underweight not just for local investors but obviously foreign investors too. For the PSU banks, the environment is a lot better than it was two to three years back. We can see that in a lot of the banking figures and the fact that they bring less in the way of nonperforming loans and growth.
Everyone was enjoying the same, but of course relative to the private banks, the valuations are a lot lower and so there has been a bit of catch-up there. I do not think I would want to chase them too hard unless there is a change in the view from the government in terms of privatisation of some of these banks.
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