High inflation and impending monetary policy tightening pose a concern for investors around the globe, but at the same time, offer unprecedented opportunities. Narayan Shroff, Investment Director, Barclays Private Clients India, tells Shaleen Agrawal of FinancialExpress.com what lies ahead for capital markets. Shroff shares asset classes and sectors on which he is bullish in the coming days. “In the next three to six months is a brilliant time for investors to think through and make allocations; there will be opportunities across the curve as well as across the credit spread, as more supply of corporate bonds come into play and so on,” he said. In the equities market, Shroff sees sectors such as IT Services, corporate banking and green mobility to outperform. Here are excerpts from the interview.
Q. One key theme we are watching closely this year is inflation. Could you give an overview of what threats and what investment opportunities does it open up for investors?
The other big structural inflationary trend is basically on two counts. One is around deglobilization. That is a theme which will last for some time, and that would be inflationary. And the second one is energy transition. And with the rising oil prices, the energy crisis is playing out, and again getting more fuel. So if we take these two trends alone, one would say that we expect inflation to be higher for longer, but the current market expectations in terms of the inflation is overplayed.
Q. What investment opportunities do these macro conditions open up for different asset classes such as debt market?
So if we talk specifically about the Indian debt market, we have seen the reaction from the markets to the latest RBI policy and the hardening in the US rates. But when one is investing, one has to take a view of at least about a year and a half or two years. What would be the state, let’s say, somewhere in Q4 2023? Our current thesis is the inflation will taper down and the growth will also remain intact. It will come back roaring up, which I don’t think is the contention in the market right now.
In the next three to six months is a brilliant time for investors to think through and make allocations, there will be opportunities across the curve as well as across the credit spread, as more supply of corporate bonds come into play and so on.
Q. How will inflation affect equities investments in the short term?
On the equity side, businesses have been hit by inflation sustaining at current levels – it hits top line, margins and valuation. It should taper down from its current level. But the impact is in the near term, it’s not in perpetuity. So as risk allocators, wherever the impact is high, in terms of bottom line and top line, currently in near term we will avoid. In terms of positive picks, these are themes that we have picked based on the structure. 1. IT services (traditional and new age companies such as product and SAAS) 2. Green Ecosystem (such as energy production and e-mobility) 3. Material (such as metal and chemicals) 4. Corporate banks and financials (such as NBFCs and select corporate banks).
What we are neutral on is the Telecom sector. We do like it as an allocation to diversify the portfolio but to a limited extent. Coming to the sectors we are avoiding and are underweight on is pharmaceuticals, and consumer discretionary.
Q. There are discussions around the world including the US that the so-called growth companies can still give returns in terms of investments amid the interest rate. In India, do you think the growth companies perform well in mdst of high inflation, and rising interest rates?
Concerns are coming around the rate hike cycle, ie, discounting factors for the cash flow heavy companies, since these are heavy cash flow companies, so ultimately one will try and value that based on a cash flow model. In the US, a lot of these businesses have gone through those cycles and are actually profitable and generating huge amounts of cash. In India, it is a mixed bag, but mostly these are loss-making, early stage companies and people are envisaging that they will slowly move to that stage, that story will continue. In terms of valuation correction, that was heating up. And from our client perspective, the so-called late stage, pre IPO market, we are very selective, one needs to dig-down deep and take a multi-year approach. We continue to participate in that. In terms of toggle in valuation, these healthy corrections will open up a new era where more saneful participation from investors will continue.
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