This investment manager feels midcap IT could be outperforming sector this year as US recession fears ease

In India, the IT sector had sold off on fears of a severe US recession, but it now appears that this will not occur. Accordingly, the Indian IT sector has started showing signs of recovery.

“In India, the IT sector had sold off on fears of a severe US recession, but it now appears that this will not occur. Accordingly, the Indian IT sector has started showing signs of recovery,” Soumitra Sengupta, smallcase Manager and Founder, Lamron Investments told Moneycontrol in an interview.

Hence, he feels the midcap IT could be one of the outperforming sectors in India this year.

On the power sector, Soumitra, who has over 20 years of experience in investing in India and US through quantitative systems, feels Budget 2023 has laid down the roadmap for green growth strategy and clean energy transition, and the allocations for this sector has been increased by nearly 50 percent.

In this context he believes the power sector is likely to benefit in the coming years. Two stocks that he likes are NTPC and Tata Power. Edited excerpts:

Do you think the Fed officials could hike rates as high as 6 percent, as they are worried about elevated and sticky inflation?

In the last FOMC meeting held earlier this month, the Fed funds target rate was raised to a range between 4.50 percent to 4.75 percent. This was a 25 bps rise and marked a deceleration in the pace of the monetary policy tightening campaign from the 50 bps in December and the 75 bps at each of its previous four meetings.

This has made the task of forecasting the Feds terminal rate, i.e. the peak rate of this tightening cycle trickier. However the consensus now emerging among Fed watchers is that the final terminal rate would be around 5 percent to 5.25 percent. So no the consensus opinion, for the moment, is that the Fed will stop before reaching 6 percent.

Is there a  possibility of strong equity market rebound after Q4FY23 earnings. Do you think Adani rout and China re-opening factors impacting the market sentiment?

Stock markets do not do well in a Fed hiking cycle, which is what the current environment is. As things stand today the estimate is that the Fed will increase rates two more times which will take us into the middle of the year. So there is some expectation that the markets may recover in the second half.

In this context, after the initial dislocation, the Adani rout will have minimal impact. China reopening does of course reduce the opportunity space for India but is unlikely to have a severe overall impact on the market sentiment.

Would you bet big on power sector as a theme in the coming years?

Budget 2023 has laid down the roadmap for green growth strategy and clean energy transition. Budget allocations for this sector has been increased by nearly 50 percent. In this context the power sector is likely to benefit in the coming years. Two stocks that we like are NTPC and Tata Power.

Do you think IT stocks are not factoring in any slowdown or recession in the US?

The economic data emerging from the US doesn’t indicate a very severe recession. True the scorching pace of the Fed rate hikes had led many to believe that there would be severe recession, but the Fed appears to have pulled off what is called a soft landing.

In India, the IT sector had sold off on fears of a severe US recession, but it now appears that this will not occur. Accordingly, the Indian IT sector has started showing signs of recovery. While the recovery in the largecap IT stocks has been more measured, the midcap IT space has shown much more vigour. Midcap IT could be one of the outperforming sectors in India this year and we are looking at this sector very closely.

Should one stay away from real estate sector given the rising interest rates?

The Indian real estate sector had witnessed a massive sell off with the onset of Covid in 2020. Since then and after the end of the pandemic, the sector has witnessed a recovery. Sales volumes both in residential and commercial space has witnessed a surge. However, the sector does face headwinds in the form of interest rates.

While the growth of the middle class, for whom purchase of homes is a priority, could make this sector very attractive, we don’t believe that we are there yet. At this stage, we are not looking at any real estate stocks.

What is your take on the consumer staples?

Consumer staples stocks form a very major part of the stock universe and on the whole, we are positively inclined towards this sector. The sector has reported very healthy numbers with sales rising at 17 percent annually over the last 3 years and earnings rising at 10 percent.

While the expectations are very positive on the food staples and in retail, the outperformer recently has been tobacco. We are very positive on this sector and there are many names to choose from.

Do you think FY24 GDP growth forecast of 6.4 percent has more downside risks than upside?

The growth forecast for the FY24 GDP at 6.4 percent is very robust and possibly the highest for any large economy in the world. The reasons for this optimistic scenario are increase in government spending, increase in low income jobs and easing of supply chain bottlenecks.

But the projection does have downside risk in the form of dependence on imported energy, reliance on foreign capital and a slowing global economy. All of these are imponderables over which India doesn’t have any control.

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