capex: Nippon India’s Ashutosh Bhargava picks four major capex games for 2022

“I expect the overall growth momentum to continue, driven by urban consumption and capital expenditure. Areas like roads, urban infrastructure and renewable energy need to be watched,” says Ashutosh Bhargava, fund manager and head of equity research, Nippon India Mutual Fund.

How do you think this year will go? Which space is your top pick for 2022?
Hopefully 2022 will be a year of normalization where the cyclical recovery we saw just before the Omicron wave continues with less disruption on the supply side or disruption due to the pandemic. I think inflation would be subdued in the future. I expect the overall growth momentum to continue, driven by urban consumption and investment spending. Areas like roads, urban infrastructure and renewable energy and then you have private sector investment in areas like China plus one and LIP recipients like electronics, chemicals, pharmaceuticals, metals and some new sectors – these sectors initially lead the investment recovery and last but not least the housing recovery. We are all very excited about this. The housing market is in good shape, even on the household investment spending side, which comes in the form of home registration and housing activity, which would also hold up. So out of the three pillars we’re all familiar with, consumption, exports, and capital spending, we’re the most positive about FY23 capital spending.

How would you play capex? Is it capital goods, road infrastructure, cement or parts of real estate or a mixture of all?
I’m thinking of capital goods, infrastructure, real estate and banking. These are the four ways you can play. In most of these sectors I think what we can expect is a very strong tailwind to earnings and if that happens you will probably see all of these sectors outperform. Obviously, we have to be selective here, but we are quite confident in the ability of these sectors linked to the recovery of domestic investment to post very good results.

What is the shape of the economic recovery and what indicators are you reading to verify this?
Consumption is a bit tricky. It’s a kind of recovery with several rhythms. It’s the K-shaped recovery. I’m sure you’ve heard of it where you have a formal sector that’s more urban, high-income consumers, they’re maybe in the best shape possible and that’s reflected just before the Omicron wave. These are reflected in data points such as SUV demand, retail sales, credit card spending. Even the housing activity is a sign that affluent consumers, rich urban consumers have very good purchasing power and confidence is also high, but you have a larger number of consumers mainly related to the informal sector, the he agricultural economy, to rural India, to their purchasing power has been impacted by COVID and even previous shocks before COVID. So what you’re seeing is pronounced weakness in that segment, the buying power there and the data points that we track like two-wheeler sales or FMCG company feedback, for example, we know that this segment is lagging so on an overall basis the consumption would chug but there are huge disparities within the different consumption segments and as investors we need to be aware of the consumption we are talking about.

We will certainly be affected by global factors such as tapering, tapering shrinkage and rate hikes on the one hand and on the other hand the global economy is also shrinking. Export demand is on the up and global investment spending seems to be taking shape. So how do you also put this piece into perspective?

The global liquidity and demand environment has helped us a lot – whether it’s earnings on the IT side or on the metals side or whether it’s on the valuations side. Our valuations have risen in line with global valuations. It’s a headwind where if the cash withdrawal is there or if the rate hikes are there. But at the same time, we have approached this year with great pessimism regarding global earnings. So I was following the data for the United States or for Europe by adjusting the redemptions that they generally do. We’re talking low single-digit earnings growth. So I think some downgrading is certainly possible, but there is a possibility of surprise that I would personally look for in per se, global benefits, or local benefits. So that’s the kind of tussle we’re facing, the valuation on one side ensures that the return expectation should probably be moderate, but at the same time the attractiveness of the earnings or the possibility of a surprise from the earnings, the low hurdle rate in terms of earnings expectation makes us constructive in the market regardless of higher valuations. So that’s the kind of environment we’re dealing with – a little confusing, I must say.

One of the big events in the short to medium term would be the Union budget. What would be your main control elements in the budget?

The importance of budgetary overtime has declined. So it’s an important event, but overall reform is an ongoing process. So that’s the first thing we have to keep in mind. Second, in this budget the government is using a lot of unspent resources. They couldn’t spend for various reasons. This budget is not lacking in resources. So I expect public spending to increase. The government would show good numbers. The areas that they would probably focus on are the ones that they talked about even last year where the execution was lacking but the intent is there which is infra capex and I think what’s needed is to provide a K-shaped recovery support that I mentioned to provide support to that low-income rural informal segment that has been impacted by COVID or other shocks. I’m sure something would happen in the form of income support or low cost housing for the rural or urban population, but some sort of targeted ad that helps improve the purchasing power of that low-income segment income/rural, I think that’s what it takes.

A word against? As in, for the year, which sector can actually surprise the street? Where should people look for value or good bets or stories backed by profits?

When I look at Nifty earnings, people are positive on a lot of the cyclical sector. I think there has been a lot of pessimism about raw materials. In fact, for FY23, FY24, this is an area where the consensus expects you to know that the Materials sector is dragging earnings rather than contributing to dragging earnings. There is a downturn that people are expecting, which I think might surprise if the demand environment picks up after Omicron and liquidity remains supportive. So, if there is a counterpart trade that one can look for, it is raw materials, energy, metals and chemicals. These can surprise in terms of earnings and therefore stock market performance.

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