Sectoral themes or bottom-up stories? Anand Shah explains the state of the market

Economic Times

3 days ago

Anand Shah, CIO- PMS & AIF Investments, ICICI Prudential AMC, says while banks are currently exhibiting resilience and benign asset quality, they face potential NIM compression due to anticipated interest rate cuts. Credit growth remains uncertain, hampered by weak demand and stagnant wage growth. Revival hinges on export growth or a boost to domestic consumption through fiscal measures to stimulate wage increases and overall economic activity.
Shah further says, consumer services exhibit a bottom-up dynamic, contrasting with consolidation in sectors like telecom and airlines. As per capita income rises, spending shifts towards services such as travel, entertainment, telecom, diagnostics, insurance, and financial services, driving resilient demand. While overall growth remains muted, pockets of growth exist within the services sector of the consumption economy, necessitating a bottom-up investment approach.
What is your take on the overall markets because of late, the Indian market seems to be consolidating. We are in the thick of earnings and this time there was not much expectation. Other than that, the Indian markets are waiting for the tariff announcement. How are you sensing the pulse of the market right now?
Anand Shah: Markets have been consolidating but that is after a very sharp uptick in the markets over the last four months. In that context, a consolidation is not bad news. The market peaked in October and then it corrected very sharply all the way till the February end when almost 80% of the smallcaps were down more than 30% from their all-time high, 60% of midcaps were down more than 30% from their individual 52-week highs and that sort of correction had happened especially in small and midcaps.
We have seen a sharp recovery in the market. What is still missing for the market to consistently do well is growth. Growth is a challenge. Topline growth, particularly for individuals, at aggregate level for the economy and for the markets is fairly slow. We are finding some pockets of the market where the earnings growth rate is still strong but otherwise demand and growth is an issue.
What are the pockets of resilience because of late, it has become hard to find good sectoral themes. Everybody is looking for bottom-up stories. Is that the case with you as well?
Anand Shah: Indeed, even within the sectors there are winners and losers and we can clearly see that. But the point is topline growth is fairly muted in general. So, even when we are looking at the consumption sector, even if you were to look at real estate capex, private capex, government capex, and even exports, everything is fairly soft and to that extent, the top line is challenged at aggregate level more or less for most of the companies.
The bottom-up way of going is identifying pockets where there is a scope for margin expansion and scope of consolidation. We have exposure in sectors like telecom and airline which are getting fairly consolidated and on the margin, the pricing power is shifting towards the corporates versus the consumers.
Separately, we are looking at metals, chemicals, even to some extent cement, those are the sectors again, while the top line can remain muted, there is a scope for margin improvement as global factors and local factors improve the pricing power and the profitability. It is interesting to note that the tone of the market experts have actually changed quite a bit because just two to three months back, the banking and financials was the consensus buy but it is not the case right now. Why is that so? Given that most of the fund houses still have an overweight stance on financials as do the FIIs, do you believe banking as a pack will continue to be one of those preferred bets? Of late, the shift is turning out to be in some of the other sectors which are yet to make a comeback, maybe consumption, autos, or anything else?
Anand Shah: Let me take banking first and then we will come to other sectors. Banking is a fairly large and fairly resilient sector as we see and very clearly corporates are not making mistakes, banks are not making mistakes. To that extent, the asset quality stress is fairly benign at this point of time. Having said that, the banks were beneficiaries of the rate hike. They had NIM expansion when the interest rates were moving up. There is no doubt in my mind that this quarter, next quarter, and maybe one more quarter, we should have some NIM compression for the banks in general as the interest rate starts getting cut. So, to that extent, while banks remain fairly valued on the margin, and relatively better placed than the broader market in terms of valuations, the growth would be a challenge for a couple of quarters to come. Obviously RBI has done enough to push liquidity and if the credit growth rate picks up and I am using the word 'if' because it is not a given that credit growth rate will really pick up because demand continues to remain an issue, the wage growth at aggregate level remains an issue, so neither corporates nor households are ready to lever up and start consuming so that brings me to the next part of that. While the bank remains muted, IT is okay, not fairly priced. We will get reasonable growth in other parts of the economy but wage growth is an issue. If you want auto to pick up, you want consumption to pick up. So what we need is wage growth and that is still missing and it will happen either through exports, the global economy post the tariff issues becoming normalised and growth picks up on the exports front or the domestic consumption gets a boost either through budget or pre-budget. That is what we are looking at.
My next question was just on that, the kind of boost that we have seen from the budget towards the entire consumption side, but from your latest fact sheet I understand you are slightly underweight on staples and you have select exposure to some consumer services. Could you help us understand what you are liking from that end of the market?
Anand Shah: Yes, as I said before, consumer services is more bottom up. We have seen fairly strong consolidation in sectors like telecom and airlines. Plus, we are still seeing robust growth in the services part of the consumption. So, as the per capita income goes up, at the top end of the per capita income, we will see increased spend in services over products and that is where we are seeing fairly resilient demand for travel, for entertainment, for telecom services, diagnostics, for insurance, and asset management – financial services in general. So, we are seeing some pockets of growth within the consumption in services part of the consumption economy and that is where we have been more bottom up. But as I said, overall growth is muted and we need to go more bottom up than top down.