‘Correction ideal time to accumulate high-quality IT stocks; volatility ahead but valuations attractive’ | The Financial Express

‘Correction ideal time to accumulate high-quality IT stocks; volatility ahead but valuations attractive’

Investors are anxious, therefore should invest in well-managed companies that how lower debt. IT companies look especially attractive.

Throughout the past decade or so, the Indian equity market has always been stock and industry specific.

The month of March might cause investors heightened uncertainty, but it is the ideal time to increase their allocation to equities and purchase high-quality companies at a discounted rate, said Sunil Damania, Chief Investment Officer, MarketsMojo, in a conversation with FinancialExpress.com. Sunil Damania said he is especially bullish on IT companies, and negated the effect of US and European markets on the sector.

What is your outlook for Indian share markets for the rest of March?

The month of March is fraught with uncertainty. We are seeing an SVB crisis, and retail inflation remains above 6%, which is above the RBI’s comfort zone. We do not know if the Fed will raise interest in the range of 50-bps or a 25-bps hike, nor do we know what the Fed’s commentary will be. In other words, several indicators suggest that the market will be volatile in March and possibly April as well, due to uncertainty. No one can predict how things will turn out. Why? Because these are events that seem to come out of nowhere, and it’s becoming increasingly difficult to fathom what they could mean.

What should investors do in this correction?

When there is a great deal of uncertainty, logic indicates that it is prudent to raise equity allocation rather than decrease it. This is due to the fact that market volatility presents an exceptional opportunity to acquire high-quality companies at a reasonable price. So, we believe now is a good time to raise allocation rather than decrease it, assuming you won’t need the money for at least three years.

What sectors or shares should investors look at?

Throughout the past decade or so, the Indian equity market has always been stock and industry specific. Except from April 2020 to December 2021, when there was a general upswing across all industries and companies. Nonetheless, the market has historically been industry- and stock-specific. So, we believe that one must be sector-specific and stock-specific within that area. Even if the industry as a whole performs well, a few companies within the industry perform poorly. We believe that the IT sector will do exceptionally well.

After the recent occurrence of an alleged corporate governance issue involving one of the world’s leading companies, investors are anxious. They wish to invest in businesses that are well-managed and unlikely to experience corporate governance issues. In India, we have some of the best-managed IT companies, which have withstood several boom-and-bust cycles and still reported growth. When interest rates climb, investors prefer firms without debt.  In contrast, a higher interest rate will enhance treasury revenue because of their huge cash and cash equivalents. Rising attrition rates presented a supply-side concern for IT companies. With attrition rates at an all-time high, IT firms should be able to increase or maintain their margins, giving investors yet another reason to buy IT stocks. The United States and European downturns have had no effect on IT budgets. Due to the underperformance of the IT industry in FY2023, their valuations have become attractive, allowing for capital appreciation.

Therefore, we believe that investors should invest in corporations with solid corporate governance and low borrowings.

What are possible factors that could reverse this downtrend?

The Federal Reserve’s recent rhetoric has been less aggressive, which could signal a reversal in the upward trend. The second reason is that any progress made towards resolving the issue between Russia and Ukraine could be a contributing element. The rate of inflation might begin falling, which would be a welcome relief and might even cause the trend to turn around.

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First published on: 15-03-2023 at 14:33 IST
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