Why ICICI Securities Continues To Bet On Cyclical Sectors
Discretionary consumption is on a structural rise as it has been in most economies in the world, he said.
ICICI Securities has a positive outlook on cyclical sectors of the economy, where there is robust growth and the prices are not as high as the more defensive sectors.
Investments in capital expenditure, the real estate market, and consumer spending are showing improvements, Vinod Karki, head equity-strategy at ICICI Securities Ltd., told BQ Prime's Niraj Shah. As more data becomes available, there is rising confidence in the overall capex and real estate cycles, and the profitability of businesses, he said.
"Polycab India Ltd., Bajaj Auto Ltd. or IndusInd Bank Ltd.—all these cyclical companies is where we are finding year-on-year profit growth expansion very robust."
The parts of the economy that follow cyclical patterns are currently driving profit growth, he said. In contrast, the defensive sectors such as IT, grocery retail, and others have shown weaker performance, according to Karki.
Where To Put Money
Equities have always chased growth. Currently, even within growth, investors need to ensure reasonable valuations, Karki said.
Discretionary consumption is on a structural rise as it has been in most economies in the world, he said.
"Our analysis on income growth is suggesting that as the formalisation effect picks up, the corporate sector wage bill is now overtaking the public sector," Karki said. "Structural uptrend where the formalisation effect and income growth, driven by the corporate sector and some of the other sectors also, are really picking up, which is going to fuel this structural rise in discretionary."
Israel-Hamas Geopolitical Tension
The flight of money to safe havens will only occur when there is a recession in developed markets, Karki said. This shift is not driven by geopolitics, according to him.
"The current conflict... I would rate it as a localised conflict, where there is no military might which divides the world into two parts."
The only situation that could significantly affect global risk is if there are disturbances in the oil market, as that could potentially impact worldwide demand. However, unless these regional conflicts cause disruptions in the oil supply, Karki does not see a case for a sudden increase in overall risks.
Global Macro Headwinds Rise
The cycle of increasing interest rates might have come to an end, he said. It means nobody is predicting that rates will go higher than their current range, Karki said.
"But the bond yield market—which was speculating that there will be rate cut, therefore the bond yields was way lower than what the Fed rate range was—that is getting recalibrated and it is getting closer to the Fed rate," he said. "I think this new environment, where people are now recalibrating that the rates will be higher for longer, it is not a case that rates will be hiked further."
According to ICICI Securities, the U.S. bond yields rose to a 15-year peak. It is becoming increasingly evident that the U.S. Federal Reserve will continue to sustain the 'higher for longer' interest rate environment, the brokerage said in an Oct. 7 note.
As a consequence, this is progressively ushering higher borrowing costs for mortgages and corporate loans across developed markets. Even as interest rates remain elevated, the outlook for global growth remains vulnerable to the Euro area and China, the note said.
"The U.S. economy has been relatively resilient so far, but there are signs of a slowing real estate market and softer consumer sentiment in the latest readings. Rising crude oil price is another risk to global growth prospects," it said.
