shares to buy | investment strategy: Be very careful but bet on these 5 sectors: Ajay Bagga
The highlight of this week was the numbers we got from the TCS. What do you think of the whole IT package? Nifty IT is down about 3% and mid-cap IT stocks have definitely taken it on the chin?
Yes, there are three big problems with IT; one is the attrition number which has been high even though TCS hired 36,000 people this quarter but with 17% attrition the market is very concerned that if such high turnover occurs with a leading company, no one can guess what is happening on midcap CE.
Second, to block attrition, salary increases will come and this will cause margins to erode. Maintaining margins will therefore be difficult.
Third, domestic companies and European companies seem a bit clouded. This is what happens in computing. Seasonally, this is normally a very weak quarter for IT, so it was in line with expectations. The TCS numbers were ahead of expectations, but the market has decided that IT has outperformed over the past 16 months, is over-owned, and maybe it’s time to let off some steam. IT steam.
I’m still bullish on IT on a one year, two year basis. I think it’s one of the sectors to hold in India along with financials, but we may have even more blood on the IT index for a while, especially mid-cap IT.
This week’s headlines come from CPI numbers as well as IIP data with inflation hitting a 17-month high. Not only in India, but also in the United States, we have seen high inflation rates. What does this mean for future returns and the markets as a whole? Does the street not sufficiently assess the margin as well as the pressure on volumes due to the increase in commodity prices?
This quarter’s numbers are going to be good as commodity price issues have been slow to materialize. Even in India, it was four to five days after the UP elections that the rise in petrol and diesel prices of 80 paisa per day started. So March really doesn’t reflect the full picture for oil. April will be worse. Overall, the interest rate cycle is turning around after a 40-year downward trend. From 1980 to 2020, US interest rates fell from 20% to 0%. 1980 was the Volcker shock when, overnight, Paul Volcker raised US interest rates to 20% to curb inflation and this led to a huge recession which resulted in Jimmy Carter losing the election. Ronald Reagan arrived with a sort of America First package.
Exactly a similar situation now occurs on the side of the mirror. We are going to see several years of higher interest rates. There is no other way out, liquidity will have to be reduced as it has reached unsustainable levels. Just to give two examples; in 1980, at the start of the last cycle, no country in the world had a debt-to-GDP ratio of more than 300%. Today, there are as many as 25 countries, including the United States, China and Japan, where total debt to GDP exceeds 300%.
So we can say that the financial sector compared to the real sector, Wall Street compared to Main Street in 1980 was a ratio of 1:1, today it is 4:1. We’re talking about $340 trillion to $350 trillion of stocks, bonds, and all financial instruments around the world at totally unsustainable levels. I think we are in trouble when it comes to stock markets. It will take a year to calm down, but ultimately we are entering a recession in the United States, which will cause global economies to plummet and I would be very cautious on stock markets at this time.
The opening theme has worked for the last two, three months. Do you see more benefits to these counters or do you think the best has already been rated?
No, no, there is a huge advantage. Summer vacation is approaching and if you look around you at traffic, mobility metrics, huge queues at airports, hotel bookings, how ARPUs are improving, reopening trade is doing really well. I would stick to it. Thus, restaurants, hotels, airports, airlines should all do very well because this part of consumption is present. People have been locked up in their homes for two years and we are seeing a tremendous amount of travel and vacation.
The other thing is that a lot of parents come from abroad during the Easter holidays. So the reopening trade is very strong and it will hold. Airlines are doing well despite high ATF prices. Simple volume growth is coming back. The airports are full to bursting and despite the increase in flights, we are seeing a good filling rate. All four flights I took were full, not a single seat was empty.
If I were to give you a blank check and ask you to invest in some meters, what would be your best bets?
I think a lot about financials, oil, gas and cement. Cement is doing well because coal prices have come down slightly and I expect prices to rise across the board. So the cement looks good. Industrialists and defense are doing well. In the case of defence, there will be import substitution in the order of $26 billion to $28 billion over the next five years. This is a multiple of what these companies are doing now and the export market is targeted at $5 billion per year after five years.
So now is a good time to enter at ground level, wherever these prices are today. If the beneficiaries of advocacy can be identified in both the private and public sectors, now is a good time to focus on them.
We have also seen the story of the PLI releasing a fair amount of exports from India. It will happen on the defense side, first on import substitution, then on the export side. So a good time to get into the defense business.