“If we look at the probabilities across rate action in the US over the coming months, the markets are factoring in a 100 bps rate cut by December,” Divam Sharma, Founder at Green Portfolio PMS says in an interview with Moneycontrol.
The 10-year treasury yields are corrected in India and US. “We see rate hikes to pause now and even rate cuts starting in September,” he says.
Divam, with over 15 years of experience in managing investments in the stock market believes the second half of FY24 would give some good value opportunities to invest in IT companies.
Q: Do you see interest rates at elevated levels in rest of calendar year or is there any rate cut possibility towards the year-end by RBI as well as Federal Reserve?
We are already seeing stress in the US banking system, GDP growth is decelerating, and unemployment is still not reflecting stress but this is usually a lagging indicator. There is a 57 percent probability of the US hitting recession by March 2024. Decades of low-interest rates and then 10 consecutive rate hikes are now showing withdrawal symptoms.
If you look at the probabilities across rate action in the US over the coming months, the markets are factoring in a 100bps rate cut by December. 10-year bond yields are also corrected in India and US. We see rate hikes to pause now and even rate cuts starting in September.
Q: Do you see a possibility of a second leg of US bank decline in the rest of the calendar year?
We see some more pain left in the US banks over the coming months. Trading action among many banks is already showcasing the stress, as many of the small banks have corrected 10-30 percent over this week. Such high rates are not sustainable and expose more credit risks for the less capitalized and aggressive lenders.
Q: Do you see the large-cap IT companies revising full-year revenue growth guidance upwards in the second half of the current financial year?
We believe that we will have to wait for the next calendar year for this to happen. Will all depend on the policy action of Federal Banks in developed economies.
Having said this, the second half would give some good value opportunities to invest in these IT companies.
Q: Do you expect the earnings growth to be over 15 percent in India for FY24?
We believe that the domestic consumption-focused sectors should achieve this earnings growth. However, the global slowdown can impact large sectors like IT. Overall, it could be tough to achieve this number as inflation is lower and volumes growth from exports can be impacted.
Q: Can the economic growth be below the 6.5 percent target set by the central bank for FY24?
GDP growth for FY24 should be 6-6.5 percent. The slowdown in IT and private capex can be deterrents. Despite this, we will still be the world’s fastest-growing large economy and attract significant FPI and FDI money over the coming quarters.
Q: Is the RBI still worried about inflation, though it seems to have shifted its focus on growth from inflation?
Inflation is definitely a concern for all the Federal banks today. Last month, we have been comfortable with our inflation targets. We have general elections next year and some key state elections this year. The global slowdown will have an impact on growth. The last thing that anyone would want is a slowdown. So, growth should definitely be more of the focus for RBI now.
Q: Will the rerating continue in the banking space considering the earnings scorecard by top private banks for Q4FY23?
These have been good times in general for banks in terms of earnings. The results tick on all parameters of NPA, NIM, and credit growth. The outlook is positive. However, the stress in US banks and the recession in developed markets can contain the rally.
Q: What is your take on Fed policy meet? Any possibility of a pause in the rate hike?
These times have been tough for the Fed. It was definitely a tough call. They had taken a strict call on inflation and they had to maintain their commitment.
The Fed understands the heightened risks of a hard landing. Inflation has come down over the past few months. The crude has now been corrected to $68 a barrel.
We do not see rates going further up from here. We could also see rate cuts later this year. However, we believe that the days of near-zero rates are now gone and in order to cut down the debt-to-GDP, the nominal GDP has to grow and inflation and high-interest rates are here to stay for a long.
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