Sector Optimism: Embracing Two Bulls and a Contrarian Gamble in IT

Category : Knowledge Center

Small-Cap Optimism: Bullish on Autos, Healthcare, and IT Despite Global Economic Challenges.

Market Experts believes that, currently, smaller companies (mid and small caps) are more attractive to invest in compared to larger companies (large caps). They think that the value of smaller companies is better when compared to their price, making them a good investment opportunity. Market experts are optimistic about industries that consume commodities, like car manufacturers and companies that make parts for cars. They also see potential in the healthcare sector, which means companies involved in medical services and products could be profitable. They also have a different opinion than many people regarding the IT (information technology) sector. Even though many are negative about it, they think it is a good time to invest. They also believe that IT companies' prices are reasonable, and some of these companies are financially stronger and more attractive when compared to similar companies around the world. Overall, they have a lot of experience managing funds, and they are positive about investing in these areas despite what others might think.

Rate hike cycle in Europe: Market experts think of the world economy as a big machine that needs three major parts to keep it running smoothly: the US, Europe, and China. Right now, these parts are slowing down, which can cause problems for global growth. In the US, the people who control the money (called the Federal Reserve) are planning to make it a bit harder to borrow money by keeping interest rates higher. They are also doing something called "quantitative tightening," which means they are reducing the amount of money circulating in the economy. In Europe, many countries are going through tough times economically, and some are even officially in a recession, which means their economies are shrinking. China, which is another big player, is experiencing a period where prices for things are going down instead of up, and this can slow down economic activity. Both factories and stores in China are also not making as much money as before. Because of all this, the global economy might not grow as fast as we would like, and this could also affect countries like India, which is considered a growth market. But there is a silver lining. People who invest money globally might see India as a good place to put their money. This is because India has stable politics, a strong economy, and lots of people buying things within the country. So, even though things seem uncertain, there could be a chance for India to do well despite the challenges happening in other parts of the world.

Bullish Sectors according to market experts: The market experts are discussing about three different sectors that could be good investment opportunities:

• Auto and Auto Ancillary Sector: This includes companies that make vehicles and their parts. The demand for cars, trucks, and related parts is doing well. Both passenger vehicles and commercial vehicles are in a good position. This seems like a promising area to invest in.
• Healthcare Sector: This sector was undervalued (people did not see its true value) for a while, but it is slowly starting to recover. This includes companies that make medicines and medical equipment. Particularly, companies in the US that produce generic medicines and pharmaceuticals seem like they could be good investments, as they have a good margin of safety and potential for growth.
• IT Sector: The IT (Information Technology) sector has not been very popular lately, but the person making the statement thinks it is a good investment opportunity. They believe that the valuations (how much the companies are worth) are getting back to normal levels. Many IT companies are financially strong and relatively cheaper compared to similar companies worldwide. While some IT stocks might have a little risk of losing value, overall, it is a good sector to consider for investments in the medium to long term, as they expect it to improve.

In simple terms, they are suggesting that investing in companies that make cars and car parts, healthcare-related products, and IT companies might be a smart move because these sectors are showing positive signs for future growth and profitability.

Experts’ views on kinds of funds getting excessive demand: In the past few months, investors have been careful about making big investments. However, money coming in through systematic investment plans (SIPs) has been good. This has especially benefited smaller and medium-sized companies in the stock market. Also, funds that spread investments across different types of assets have become popular among investors lately. There is a growing interest in passive index funds and exchange-traded funds (ETFs), which automatically follow specific market indexes. These funds are getting a lot of attention from investors and attracting new investments. About 22% of all the money invested in mutual funds that buy stocks now goes into these passive funds. I think that these funds can be helpful in bringing in new investors who are just starting to invest. They are cheaper and easier to understand, so investors can clearly see what risks and rewards they might get. At DSP, we are working on educating investors to help them understand this better. For example, we recently launched the #LetsIndex campaign, which focuses on how simple index funds can be a great way to begin investing.

Experts’ views on assessment using the C-F-E framework and explaining it:

Corporate Earnings (C): This part focuses on how well companies are making money. Corporate earnings have increased significantly since the last peak in October 2021. For example, if we consider a group of top 50 companies (Nifty50), their earnings per share have grown by a healthy 30% from a value of 650 to 850. So, with the Nifty50 index at 19,500 points now, the companies in it are being traded at a price that is 23 times their recent earnings. This is a bit lower than the 28 times back in October 2021. But it suggests that there might be limitations on how much higher the prices of these stocks can go based on their earnings alone.

Flows (F): This aspect looks at the money moving in and out of the stock market. In the last year (2022), global investors pulled out $16 billion from our market. However, in just the first seven months of this year (2023), we have already seen a large amount of $15 billion coming into the market. So, while we might keep getting more money coming in, the speed at which it is flowing in could slow down in the next few months.

Event Risks (E): This part considers potential events that could impact the market. Right now, there are some concerns. The world economy is growing more slowly, and the amount of money available in the market is not as abundant as before. Additionally, interest rates (the cost of borrowing money) are relatively high. All of this suggests that we should be careful. Companies that are being traded at very high prices compared to their earnings, especially if they are not making extraordinary profits, could face a situation where their stock prices decrease. This is often referred to as a correction.

In simpler words, through this assessment market experts are telling us that while companies are making good money, the prices of their stocks might not be able to go up by a lot based on earnings alone. Money is coming into the market more now, but it might slow down later. The overall economic growth is not super strong, and borrowing money is a bit costly right now. So, companies that are expensive but not making huge profits could see their stock prices drop. This assessment suggests that we need to be cautious about investing in such companies.

Experts’ views on exploring investment potential in the Staples Sector: The country's economy is recovering in a somewhat uneven manner. People in rural areas are starting to spend more money again, and this trend might continue if the monsoon rains and the planting season go well. The prices of basic goods like crops and minerals have gone down, which is good for companies that make everyday products. For instance, companies that sell things like packaged foods and toiletries are making more money because their costs have decreased. If someone wants to invest in this sector, they should be careful and choose companies based on how well those companies are doing. Some companies might be better options than others. Picking the right companies could be a smart move because these companies might become more profitable over the next few months.

Experts’ views on Midcap and small cap space: In simpler terms, currently, smaller companies in the stock market are being valued more favourably compared to larger well-established companies. Let us take an example from India and the US: In India, big companies (large-cap stocks) are being traded at a price that is 23 times their earnings, while smaller companies (small-cap stocks) are being traded at a price that is 18.5 times their earnings. In the US, large companies are being traded at a price that is 19.6 times their earnings, while smaller companies are being traded at a price that is 16.5 times their earnings. Normally, foreign investors prefer to invest in big companies because it is easier to buy and sell their shares without causing big price swings, and there are limits to how much money they can invest in smaller companies. But these investors also like to invest in companies that are consistently making more money over time. So, when the overall stock market and the main stock market indices go back to their typical average values, it might be a good idea to pay more attention to smaller and medium-sized companies. This is because they are currently being valued more attractively, and if they continue to grow their earnings steadily, they could provide good investment opportunities over the long term.

Conclusion: Market experts believe that smaller companies are better to invest in right now. They suggest looking into car manufacturers, healthcare, and IT companies. The world economy is facing challenges, but India might be a good investment option due to its stable politics and strong economy. Funds that spread investments are popular, like index funds. Assessing companies involves looking at their earnings, money flows, and potential risks. Be cautious about expensive companies with low profits. The Staples Sector, selling everyday products, could be profitable due to lower costs. Smaller companies are valued well compared to big ones, making them interesting for investors.