Categories: Stock Exchange

stocks to buy for long term: ETMarkets Smart Talk: There’s value in IT, FMCG, financials and agro stocks for long-term investors: Pradeep Gupta, Anand Rathi Group

Over the last two years, there has been significant underperformance by the financials. For long-term investors, I see considerable value in variation issues of financials, says Pradeep Gupta – Co-founder & Vice Chairman, Anand Rathi Group.

In an interview with ETMarkets, Gupta who has over 2 decades of experience in financial markets said: “I like some of the private sector banks, non-banking financial companies, brokerages, wealth managers, etc. from a longer-term perspective.” Edited excerpts:

RBI’s surprise rate hike knocked the bulls out of the D-Street arena. What repercussions could it have on earnings, markets in general as well as currency? What is the future trajectory of hikes?
The recent rate hike by the Reserve Bank of India (RBI) is obviously aimed at controlling inflation. While there are various channels through which an increase in policy interest rate can dampen inflation, it inevitably reduces demand in the short term.

Consequently, the near-term impact of a rate hike on growth and thereby corporate earnings is negative.


Simultaneously, policy rate hike also increases the risk-free rate and thereby the discount rate for future earnings. These, in turn, reduce the valuation of companies.

Taken together, the near-term impact of a rate hike should be negative on corporate earnings and the equity market.

However, since rate hike and thereby inflation control aims at stabilizing both growth and inflation in the medium to longer-term, monetary tightening should have a positive impact on longer-term corporate earnings, discount rate as well as equity valuation multiples.

Therefore, unless the rate hikes are too stringent, a tighter monetary policy during a phase of high inflation should be long-term positive for the equity market and corporate earnings.

By reducing the interest differentials with the rest of the world, rate hikes should strengthen the domestic currency. Therefore, the recent rate hike by the Reserve Bank of India is positive for the Indian rupee.

We expect India’s medium-term inflation to hover in the range of 4.5%-5.5%. Historically, the Reserve Bank of India has aimed at keeping the real repo rate at 100 to 150 basis points.

In view of this, we expect the peak of the cycle repo rate around 6-6.5%. Accordingly, we expect the RBI to tighten the repo rate by another 200 basis points over the next 24 months.

The US Fed was also not far behind and raised rates by 50 bps. What are the potential risks to India from a Fed hike?
An aggressive rate hike cycle by the Federal Reserve can result in further strengthening of the US dollar and reduce the global growth rate.

At the same time, this can result in the withdrawal of investment from riskier assets including equities and emerging-market assets.

The risks to India from the rate hike by the Federal Reserve are, therefore, capital outflow including further reduction of FII holding in Indian equities and depreciation of the rupee versus the U.S. dollar.

What is your investing style and mantra to pick stocks?
I believe in strategic portfolio allocation where the key decision is asset allocation among competing asset classes like equities, debt, fixed deposits, real estate, gold, and various other assets.

Equities are one of the most attractive asset classes for long-term investors. However, in the short term, equities are highly volatile.

Therefore, equity allocation should be for a longer period spanning at least three years. For most retail investors including me, the best way to take equity exposure is through mutual funds rather than direct equities.

This is not because I think picking up the right stocks is a difficult task, but because this is a full-time job. Therefore, it should be left to the specialised fund managers who do this job on a 24/7 basis.

That said, many retail investors would also like to have some direct equity exposure. For them, my advice is to avoid tip-based or news flow-based investing over short periods.

While such investing sometimes yields high returns, this can also be highly risky and therefore not worth investing on a risk-adjusted basis.

There are only three things that decide stock prices over the longer-term – fundamentals (both macro and corporate), liquidity in the stock market, and valuation.

One should have a fair idea about these over a 3-year period to invest in individual stocks.

In a rising interest rate environment – should one tweak their portfolio. What is the ideal asset allocation strategy?
The phase of the interest rate cycle certainly has some impact on returns by various asset classes. In that sense, a rising interest rate cycle should require some tweaking of a portfolio.

However, in the strategic asset allocation approach, the one which I recommend, much bigger considerations are return expectations, risk tolerance, cash flow situation, and investment horizon of the individual investors.

Once the portfolio is constructed on the basis of these factors, the requirement for tweaking the portfolio based on the business cycle is not substantial.

It is generally perceived that in a rising interest rate cycle, the interest-sensitive part of the equity market and bonds underperform. However, other macros and corporate-specific situations decide the fate of individual securities.

The idea framework for asset allocation continues to be the strategic approach that incorporates the key considerations of the individual investors and keeps the portfolio largely unchanged despite short-term volatilities of the market including the phases of the interest rate cycle.

What is your view on some of the beaten-down sectors in the last one month – IT, realty as well as telecom? Do they fall under the category of value buy?
The recent underperformance of most of these sectors particularly information technology and real estate needs to be seen in the context of strong outperformance previously.

Compared to most of the earnings-based valuation multiples, the current valuation of these sectors are not extremely attractive.

Therefore, I do not think these sectors could be called value buying opportunities; in fact, with the possibility of near-term headwinds for global as well as Indian equity markets, the real estate sector might underperform in the near term.

Globally the technology companies have faced significant headwinds in the last 6 months. Part of this can get transmitted into the Indian information technology stocks as well.

While on a bottoms-up basis, we like some of the companies from these sectors, we cannot call these sectors as value sectors at this point of time.

Where is value emerging in this market? Where does smart money seem to be moving?
Over the last two years, there has been significant underperformance by the financials. For long-term investors, I see considerable value in variation issues of financials.

I like some of the private sector banks, non-banking financial companies, brokerages, wealth managers, etc. from a longer-term perspective.

I like Indian IT as well, going forward. I also expect a revival of rural demand, which can have a positive impact on select FMCG companies, two-wheelers, and various agro-related sectors.

What is your take on the small & midcap space? The broader market outperformed in the recent months? Will the performance get impacted in a rising interest rate environment?
While mid and smallcaps have underperformed the largecaps for a couple of years prior to the pandemic, these companies have outperformed since then.

From a medium-term perspective, we are positive on the prospects of these. Yet, the outlook does not look particularly encouraging in the near term as investor risk aversion in equities continues.

Should investors reconsider investment in high leverage or growth companies? What is your view?
Indian equities are attractive because of their growth prospects. I prefer growth stocks over others. Some growth stocks such as those in the capital goods sector can also be leveraged.

We are positive about India’s investment team and therefore positive in the capital goods sector. These companies can be attractive in the medium term.

In a rising interest rate cycle, however, other types of leveraged companies can underperform unless there is operating leverage.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)

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