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Recession, if it happens, likely to be shallow and short-lived, says Jaspreet Singh Arora of Research & Ranking

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July 09, | by: Jaspreet Singh Arora

Research & Ranking's Chief Investment Officer Jaspreet Singh Arora is bullish on the IT sector as he sees robust demand visibility for the next 1-2 years.

According to Arora, price correction in markets is happening because of the actions (like interest rate hike) of various governments which is not actually a sign of recession. So, even if a recession happens, it is expected to be a shallow and short-lived one, he feels.

So, CIO prefers large-cap IT names versus mid-caps due to valuations. "Today organizations understand the importance and role of technology for survival and growth." Edited excerpts from the interaction:

What's the mood at the HNI clients' desk right now, considering the world is grappling with inflation concerns, geopolitical tensions and fears of a recession in the US?

Of the three primary concerns facing the global economy today - (1) relentless inflation, (2) geopolitical tension and (3) the spectre of recession - inflation seems to be a more sticky issue, nagging our investors. We believe the world will find an economic solution to address the fallout of the Ukraine conflict if not a geopolitical solution.

Countries have taken various measures such as export bans and interest rate hikes and we can already see signs of inflation easing off from its peak with prices dipping across most commodities including crude oil, metals, edible oil and other soft commodities.

The price correction is happening because of the actions various governments have taken which is not actually a sign of recession. So, recession, even if it happens, is expected to be a shallow and short-lived one.

Clients’ sentiments have weakened a bit but not much which could be attributed to the education and information on wealth creation.

What's your stock picking strategy in the current market?

In terms of our strategy, we have a long-term focus, which is fundamentally driven and our aim is to generate alpha taking Nifty as a benchmark. We have a 10-core-rule strategy on both qualitative and quantitative measures to shortlist stocks. The quantitative includes parameters such as return on equity (RoE), return on capital employed (RoCE), the number of years positive free cash flow (FCF) is delivered, sales and PAT, CAGR growth, Beta level and more.

Our portfolios are bucketed in three categories -Structural growth with a 3-5 years view, Momentum stocks with a 1-3 years view and Special Opportunity with a one year view.

Though the current valuations look attractive, we normally suggest investing at least 50 percent now and balance in a staggered manner over next 3-6 months. In the current fall from October 2021, the valuations of midcaps and small caps have come-off 20 percent and 28 percent respectively, as compared to the 15 percent that large caps have given up. We currently prefer midcaps with strong fundamentals, keeping prudent asset allocation and volatility risks in mind.

What are the sectors that you would bet on and why?

The sectors that we are focusing on are the emerging themes such as E-mobility, renewable energy, Digitalization, China+1/PLI, emerging tech landscape, and India per capita GDP tripling from current $2000.

Are you still bullish on the auto space, even though it has surged about 30 percent from March lows?

The auto sector is underperforming for last 3 years owing to multiple headwinds like rise in insurance and fuel costs, semiconductor shortage issues, commodity cost inflation, and competitive intensity in electric vehicle (EV). The current recovery in auto stocks is largely led by softening in metal prices. However, rise in interest rates, steady fuel prices, and industrial recovery taking a longer time are headwinds. We have an equal weight/neutral view on auto sector currently.

Do you think the FIIs will return to India after September quarter?

A large brunt of the FII selling has been borne by two sectors – IT and financial services contributing 93 percent of the sell off. Current selling is the highest absolute selling ($28 billion, almost 2x of GFC (Global Financial Crisis) selling of $15 billion). It is the one of the longest stretches of selling (almost 13 months versus GFC which was 7 months).

But the impact on equities has been minimal as Nifty has fallen by +15 percent compared to +50 percent during the GFC sell off phase. This has mainly happened as DII inflows has countered the FII outflows. Also India has recorded highest ever annual FDI inflow of $83 billion in 2021-22 and is amongst the top 10 FDI recipients globally.

Today India remains an attractive destination and is among the top 5 in terms of GDP. India is one of the few emerging economies with healthy fundamentals from both near and long term outlook. It will be amongst the fastest growing large economies in the world in 2022 and 2023. FII flows thus will reverse sooner than later.

Is the correction and consolidation coming to an end in the IT space? Is it the right time to start taking exposure to the IT stocks? If yes, what is your pecking order?

We are positive on the IT sector as demand visibility is robust for the next 1-2 years. The FII sell off since October 2021 has been mainly driven by high valuation, profit booking, and the recent recession concerns in US. The pressure is likely to continue for a while.

Even though recession happens, it's going to be short lived. Today organizations understand the importance and role of technology for survival and growth. We prefer largecap IT names versus mid-caps due to valuations.

Will the bulls get back into action mode in the coming months or do you expect one more round of significant correction before that?

Corporate earnings is expected to remain healthy despite near term concerns of inflation and recession in US. Nifty earnings per share (EPS) is expected to grow 18 percent in FY23 and 13-15 percent in FY24. There can be a period of consolidation or time correction amidst volatility in the near term before we continue our way up and make a new high.

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