Monday, October 10, 2022

Welcome to The Weekly, where our team shares a few thoughts to take you into the week. This week’s thoughts have been brought to you by Sagar Lele, Founder of Rupeeting. He manages the All-Weather Portfolios at Rupeeting.

More Pain Going Forward?

Three key updates from last week, which simply hint at more pain going forward.

1. The RBI raised rates by 50 bps to 5.9%, lowered growth projections for FY23 to 7% (from 7.2%), and maintained inflation projections at 6.7%

   Higher rates, lower growth, but no change in inflation

2. Fears of the Fed raising rates by another 75 bps increased as unemployment data continued to come in at record lows of 3.5%

   Fastest rate hikes, negative GDP growth, lower earnings forecast, but a super hot job market

3. OPEC, Russia and other allies in the oil-producing clan decided on cutting oil production by 2 million barrels per day, its biggest cut since 2020.

   Higher oil inflation is on the cards after oil prices dropped by a third in recent months

<aside> 💡 Our view: We've been of the opinion that much of the inflation globally has been supply-driven. Central banks have been pretty synchronised in their efforts to cut the demand side of the equation. However, given the fact that supply is so much easier to manipulate (Russia’s pipeline drama and now OPEC’s cut), it seems likely inflation-related pressures are likely to continue being a pain for some more time. We would continue being cautious about equities till we start seeing signs of a structural change.

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An Idea (or 3) - NBFCs, Auto and Consumer Durables

Despite the rising interest rate environment, India witnessed a nine-year high in credit growth that crossed 16% YoY! Even compared to the credit-fueled consumer behaviour seen in the US, India’s growth has been higher!

Despite the worsening global economic outlook, India’s consumption seems to be stronger than ever. But there’s one problem - deposit growth hasn't been catching up with lending growth. Eventually, banks will either have to increase deposit rates or spend more on gathering deposits in order to maintain the balance. We’re hence sketchy on the near-term outlook for banks.

But, here are the 3 sectors that have the potential of doing really well, thanks to growth so far, and demand tailwinds for the future.

1. NBFCs
   • India’s services sector saw a growth in credit to 17% from a previous 2.1% - most of this was driven by lending to NBFCs
   • NBFCs have been seeing a strong growth in AUM, and the macro data seems to be supporting a case for continued strength in performance
   • Moreover, NBFCs are relatively less impacted by the pressure banks have to match deposit growth to lending growth, where the gap has been increasing dramatically
2. Auto Sector
   • Strong growth was seen in Personal Loans (20% YoY), much of which was driven by vehicle loans
   • Auto sales in the past few months have been strong and the credit data supports the fact that we may see further growth in sales
3. Consumer Durables
   • Yes, people have been buying a lot of ACs and refrigerators, with a growth of 65% YoY in loans for these products (compared to 47% earlier)
   • This could be attributed to credit card penetration, low-cost EMIs and Buy Now Pay Later apps/schemes

<aside> 💡 Our view: With the markets being impacted by global factors, dips will often lead to selling across the markets. There is potential for sectors with strong fundamentals and tailwinds to also get beaten down during these falls. Any valuation mismatches (relative attractiveness given fundamentals) can throw open opportunities for the long term.

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How We’ve Fared