How are things? Are they fine? Because last two years the returns have not been fine.
Yes. Things are fine. Doing great. Markets are also fine. Yes, last 18 months they have been flat. But I think it has gone through a period of consolidation. And earlier, I mean there were concerns that the market’s valuations were expensive while growth was good. I think the good thing is that the valuations are now corrected to more reasonable levels. There are some concerns about growth slowing down, earnings downgrade. But still we are in a period where we are seeing decent earnings growth, at least in double digits even for next year and I think a lot of the fears about high inflation, interest rate hikes are now looking behind us.
So, I think while the market might not do too much from a short-term perspective, it is creating a good support for making the next move over say medium to long term.
What could be the trigger here? Because earnings are not exactly expanding. Metals numbers have topped out, IT numbers have topped out, for banks base effect has kicked in. So, are we really in for a good earnings trajectory?
Yes, I think while there have been some disappointments. We saw in the IT sector there was a disappointment which was expected but not to the extent what we are looking at. And there is some slowdown in the consumer discretionary side. The numbers have been mixed, but by and large if you look at the large sector, like for example, banking and financials, very few numbers have come out but look to be fairly on track over there.
Even in sectors like domestic engineering, capital goods sector numbers look good. Even in cement, I think you should see improvement of what we saw in the previous quarter. And amongst the global cyclicals, even metals, I mean last quarter was a fairly bad quarter. There also, sequentially, we are looking for improvement in terms of the pricing environment now with China opening up.
So, I would say that by and large, even for next year, even after the numbers what have come, we have seen around just about 2% to 3% downgrades to earnings. I mean, earlier, the earning expectation growth was around 16%, so that will probably be around 12-13% in that range, which is not bad in the current context where we have seen global growth, especially in the developed markets where the growth would be more or less flat.
Every large fund are overweight on financials, that is one space where growth is visible, that is one space where NPA problems are not there. But when we speak to the top bankers in India, Axis Bank or SBI, all of them are talking about moderation in FY24. Are markets prepared for moderation in credit growth or profits?
You are right. I think because A) while the GDP growth in real terms might not come down so much, but in nominal terms there will be quite a bit of decline because the inflation, especially WPI, which was driving nominal GDP growth very strong, I think that will come down dramatically in FY24.
So, we are expecting nominal GDP growth to be actually somewhere in the high single digits. To that extent, credit growth will also normalise. But I think to a large extent, I would say that it is factored in because if you look at the valuations in the banking space, they are not really demanding. I mean, most of the banks would probably be near their long-term average or slightly below that and mind you, I think, overall the profitability trajectory for the banks is much better than what it was during the pre-COVID levels.
So, both the ROAs and the NIMS are in benefit of the increase in the interest rates, initially the benefit on the asset side, but as the liabilities costs move up you will see some compression over there.
But despite that, I think we expect overall NIMs and the ROAs to be much better than the pre-COVID level. I think that would probably justify better returns or better valuations for the banking and financial services sector. And to that extent, I do not see much of a concern. I think markets are already started talking about a lower nominal GDP while credit growth which was around 15-16%, we are expecting that to be around 11% or so in FY24.
I am curious to find out what is it that you have done within your funds when it comes to IT? Because most funds have ownership within the IT pack and especially after the disappointment that TCS and Infosys have been, have you reduced weightage there?
No, we have not done much. Actually, we were slightly underweight on the IT sector. We were not too negative also on the sector because we think that this is a kind of a transitionary period. Over a medium term, we still expect the sector to do reasonably well with good cash flows, with good earnings yield. We do not see much of a downside over there. Obviously, the growth is missing, so it is not exciting sector really to be in. But there are challenges across various sectors. So, given that we were slightly underweight, we continue to maintain that. I think, post the recent correction of what we have seen, now I think the stocks seem to have actually bottomed out at least from a valuation perspective.
Now it is a question about what the earnings growth is going to be. And here again, I think we are seeing some kind of a divergence there. Few companies recently are showing reasonably good growth or probably meeting their guidance, but there have been some disappointments. So, we will have to wait and see. But I would say that at this point in time, we are kind of neutralish on this sector. We are not really too negative because valuations are already now corrected to levels slightly above the pre-COVID levels.
Any contra calls that you may have in this current market, especially after the fall up until March 29th and the recovery thereof? For instance, one is seeing FMCG, pharma kind of sectors make a comeback.
Yes, so, I think in terms of contra, the sectors like consumer discretionary, consumer durables, retail, we have seen marked slow down there in the last quarter and possibly in this quarter also. There has also been a meaningful correction in some of these names which were quite expensive earlier. I think structurally in India we expect discretionary consumption to increase as a percentage of total consumption because of rising per capita income which is happening and this could be a good opportunity in this correction where the numbers are likely to disappoint.
Pharma is another sector which has kind of underperformed after rallying after the post-COVID wave. We have seen numbers which are disappointing, especially in the US generic space. Again, there also what we hear is that the pricing pressure which was there in the US generic space is slightly easing off. There is still price decline, but the pace of decline is now reducing as there is some amount of consolidation happening on the supply side. So, I think that again is a sector which can be a good contra call considering the fact that there also valuations from the large companies are fairly reasonable compared to their historical averages.
