India continues to remain a sweet spot in global market: Anand Shah

“You had two large blocks of economy which were artificially slowed down and obviously we had a significant rate hike in US which also created some bit of slowdown in that segment. I think as we go forward one year, China will continue to get normalised and provide some global growth,” says Anand Shah, ICICI Prudential AMC.

When it comes to the IT space what is the rationale for being underweight on that sector?
I think in IT sector there is no doubt about quality of businesses and management that we have in India. However what happened is that there was significant higher growth rate in that sector in 2020-2021 which was the Covid years and people mistook that as a new trend. I think that exceptional growth which we got for the two years was more of an aberration than the norm. What people are realising over the last one year is that that growth is not to be repeated. As the economy opens up, as the clients for the Indian IT companies spend more beyond IT on people, on office and other expenses, IT spends have reduced. There has been a moderation in growth and that is what you are seeing in last one year that notwithstanding the strong numbers that IT companies are delivering, there is a moderation in growth expectations for those businesses and that is reflected in the lower PE multiples that these companies are trading at today versus last year.

So do you see that for the year, next 8-12 months, the upside for the market has been played out?
Again, very difficult and to be very honest, India continues to remain a sweet spot in the global markets. Last year had been very tough from a macro perspective. We had a very large economy like China was under lockdown and you had Europe as a block suffering from very high energy prices.

So you had two large blocks of economy which were artificially slowed down and obviously we had a significant rate hike in US which also created some bit of slowdown in that segment. I think as we go forward one year, China will continue to get normalised and provide some global growth. Europe should claw back into the growth region again. US remains challenging as far as growth is concerned, should slow down rather than continue to grow at the pace at which it is growing. So that is global and that is more balanced on the positive than negative and looks better than last year.

When it comes to India, I think India has never been a challenge. I think the growth is not great but it is still good relative to the rest of the world. We had a lot of outflows from FIIs last year. People did do a trade of sell India buy China and so on and so forth. So those flows and the Indian domestic flows which had been very resilient last year will determine whether the market gets re-rated or not. As I said, earnings is not a challenge. I think on a low base of FY23, FY24 should be reasonably good. Again, too early to make clear calls but I still believe segments of the market will continue to drive earnings growth and the flows will determine whether the market gets further re-rated or not.

If I scan through your portfolio, very little IT is there, very little consumer discretionary is there and staples obviously, they are expensive. So I know why you are not buying them. But why no IT, let us say in your contra portfolio?
I think it is more where is the earnings growth rate? People are missing the point that there was almost a decade when the earnings growth rate was only in the consumer facing business and services industry and manufacturing was a drag on earnings growth rate and which dragged down the earnings of the corporate banks.

I think that trend change is something, we have been talking about for a while that today, the low end of manufacturing, mid end of manufacturing is driving earnings growth rate, it is growing faster than the index. It is also driving the growth rate in banking as the slippages reduce and recoveries increase.

I think this big trend change where China which was exporting deflation, which was helping consumer companies and hurting the manufacturing, that trend change has happened.

Now you are seeing China exporting inflation to the rest of the world, even the rest of the world, be it US, be it Europe, be it India are also making sure that there is no dumping.

Now this means that manufacturing, whichever has survived last decade, has started doing extremely well on earnings front, the valuations are very comfortably placed. On the contrary, the consumer facing businesses are facing a lot of input cost pressure, which is then driving the lower margins or lower growth as we are already seeing last two quarters.

So that is the reason why there is an overweight on non consumer businesses, more non B2C and underweight on B2C businesses. IT as I said, is more of a near term call that while the businesses are great, the valuations were wrong, expectations were wrong. I think in another two quarters of earnings, the expectations will be setting right and that would be the time to look at them afresh.