Daily Voice | Expect more challenges and M&A activity in US & EU banking space, says Sahil Kapoor of DSP Investment Managers

Earnings growth and variability of earnings remains the key risks to markets.

On the recent banking crisis, Sahil Kapoor, Head – Products & Market Strategist at DSP Investment Managers says most measures of interbank risks are still contained and need to be monitored closely for any disruptions to this space. He expects more challenges and M&A activity in the banking space in US and EU.

On India, he feels earnings growth and variability of earnings remain the key risks to equity markets.

On the sectors, Sahil with more than 14 years of research experience across asset classes and businesses says DSP is overweight on banking, healthcare, select consumer names in auto and auto ancillaries, and engineering & infrastructure space.

What is your take on the FOMC meet outcome?

The US Federal Reserve raised rates by 25 bps which was in line with street expectations. Fed’s 450 bps of cumulative rate hikes has to be seen in context of the developments of the last two weeks. The banking crisis in the US has caused financial conditions to tighten. This has had an impact of as much as 50 to 75 bps additional rate hike.

At the same time, retail sales data came weaker and US producer price inflation slowed. A slowing economy and tighter financial conditions will allow Fed to now review its policy. It appears that from a ‘higher for long’ stance on rates, the rates are now high enough and the Fed is now likely to address for how long would they need rates to be at these levels.

Do you think Asia is a better place to be invested than US or Europe?

Asia is witnessing a growth revival while the west is trying to manufacture a slowdown. This is providing a better economic backdrop in Asia for firms to do well. But even then, countries, where firms are able to benefit from economic growth and grow their earnings steadily, will provide investment benefits.

Hence it’s important to focus on high-quality companies adjusted for valuations in markets like India, China and other Asian countries.

Do you think the government’s capex push is really complemented by private sector capex? Which are the sectors to benefit the most?

If we consider BSE 500 financials, the Net Debt for this universe of companies has fallen from Rs 12 lakh crore to Rs 8 lakh crore over the last three years. India Inc’s profitability is also steady and at record levels. This creates conducive conditions for capex revival.

The overall government capital expenditure, including IEBR is now touching Rs 13.5 lakh crore annually. This provides a definitive nudge to private capex. Moreover, the gross fixed capital formation in India, which includes households, private enterprises and government spending on fixed assets, is now clocking $1 trillion. This is the fourth largest spend in the world.

From now to the next few years India is likely to get benefits of scale in infrastructure and engineering sectors which was absent for years.

Is the worst over for Indian banking space and is it a great time to invest in the sector?

Indian banks are witnessing strong credit growth along with robust asset quality. The net NPA ratio for large banks is now reaching multi-decade lows. Lenders have been reporting strong financial performance.

The NiftyBank Index is now trading at 1.9X forward Price to Book multiple which leaves an excellent margin of safety for investors. Expect this sector to do well over time with limited downside.

Do you expect more risk in the US and European banking space in months to come?

The global central banks have learnt some lessons from the global financial crisis. The liquidity backstop and regulatory steps taken by the US Fed, ECB and other central banks are likely to keep a lid on the crisis so far.

Most measures of interbank risks are still contained and need to be monitored closely for any disruptions to this space. We expect more challenges and M&A activity in the banking space in US and EU.

In the report, DSP says India’s external situation is likely to normalize in FY24. Is it really possible considering the global environment?

India’s external situation is sensitive to movements in oil prices. It remains one of the largest import items. The Indian Crude Oil basket had declined from upwards of $120 a barrel at the peak of the crisis to now $70. This has provided a lot of comfort to India’s trade deficit.

Moreover, India’s Services surplus is now approaching 1.5x of oil deficit on a monthly basis. This growth in India’s services exports is not only limited to IT&ES and as per historical data, even when the world economy slows India’s services exports slow at a lesser pace than India’s oil import bill. This will likely help to normalize India’s external situation.

What are the biggest challenges in FY24?

Earnings growth and variability of earnings remain the key risks to markets.

Where do you want to put your money in terms of sectors now, given the recent sharp correction?

We are overweight on Banking, healthcare, select consumer names in Auto and auto ancillaries and engineering and infrastructure space.

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