"The Federal Reserve is likely to end its interest rate hike cycle in May 2023. But there is a caveat that the downtrend in relevant job and inflation indicators should continue," K Ramkumar, the Chief Investment Officer at Reliance General Insurance Company says in an interview with Moneycontrol.
Among sectors, Ramkumar with experience of over 29 years and expertise in the areas of banking and investments says they are cautious on IT and moderately cautious on pharma exports.
"Our caution on IT is due to the uncertainties coming out of US, UK and Eurozone where they are substantial headwinds to growth. Europe and UK continue to have higher inflation and higher interest rates in the months ahead which may scuttle their growth," he adds.
Is the pharma sector a good bet now, after recent correction?
Pharma & Healthcare is one sector where it is not advisable to take a sector call and view. The variance in business model is quite different for every company. This shall be proved even if one analyses the performance of all companies in pharma in the last 3-4 years. The performance differential between the first and last quadrant is quite substantial.
One will be surprised to see even the direction may not necessarily be the same. It is because the parametric positioning between exports versus domestic / generic versus export formulation / Developed versus Emerging exports / OTC versus prescription / Controlled and free pricing are all different.
In addition, unique company-specific problems like FDA audits also add to the risk and predictability. The trend of varying performance of companies within the sector will continue in the future too.
Do you have a cautious view on any sector for FY24?
Yes. We are cautious on IT and moderately cautious on pharma exports. Our caution on IT is due to the uncertainties coming out of US, UK and Eurozone where they are substantial headwinds to growth. Europe and UK continue to have higher inflation and higher interest rates in the months ahead which may scuttle their growth.
Do you still expect more trouble in the US banking space?
Considering the extent and the swiftness of interest rate increases in the past and their overall impact on banks' balance sheets, it is very much possible that the worst is behind us. This is because the incremental pace of acceleration and the quantum of the rate increases are not expected to be substantial in the future.
But we cannot ignore the fact that stress resides in the investment book and the balance sheet of banks which need to be managed well.
The weaker banks are still prone and hence we may see more negative news coming out of the US. However, the medicine for bank stress has been found but the diagnosis shall continue.
Do you think the Federal Reserve will end its interest rate hike cycle in May 2023?
Yes. It is very likely to happen. There is a caveat though that the downtrend in relevant job and inflation indicators should continue.
Is it possible to bring inflation below 5 percent and sustain below the same in the current financial year?
Yes, I am assuming it is in the context of India. Once the reading goes down below this, even the base effect will ensure its sustenance unless any spike in commodity prices happens due to supply disruptions.
What is your reading on the earnings of leading IT companies (Infosys and TCS)?
We do not comment on specific companies. The earnings of the sector shall remain muted in the sector in this quarter and guidance will be lower or uncertain.
If we get the strong sign for end to the interest rate hike cycle, do you see the market at new highs sooner than later?
Equity markets have not performed well in the start of the rate cut cycle due to economic concerns superseding other positives. The rally happens at the end of the rate-cut cycle when valuations become reasonable and benefit flows into earnings.
Equity markets perform better when economic and inflation trends higher. We are not likely to see this in the next few quarters.
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