PMS Bazaar conducted an Exclusive Interview with Mr. Surjitt Singh Arora, Portfolio Manager and Principal Officer - PMS of PGIM India. This Interview is a Part of our Special Interview series, which will offer valuable insights from leading industry experts. In this Blog, we have extracted some key insights from the exclusive interview, for you to gain quality insights & investment perspectives.

Excerpts from the interview:

Key Learnings from Previous Financial Year

We are approaching the end of the fiscal year 2023. The primary lesson we have learned from an equity market perspective is that uncertainty is an inevitable factor we must accept. Over the past year, we have witnessed various events, including the Fed's significant increase in interest rates, the commencement of the Russia-Ukraine war, and fluctuating commodity prices. Ultimately, equity investments will always be subject to volatility due to ongoing market uncertainty.

According to Mr. Arora, “As fund managers, our most critical lesson is to remain aware that we must manage market risk and volatility. However, we must also prioritize protecting our investors' capital. Given the current uncertain global environment, we must be certain about our investment decisions, including sector allocation, deployment strategies, and the allocation of funds to sectors with high P multiples or EVY multiples.” In the current market environment, we must remain aware not to become too enthusiastic and not to chase momentum blindly. We must ensure confidence about the sectors and individual stocks we select for our investors.

Sectors that are bullish/overweighed

According to Mr. Arora -If we compare our portfolios, we can see that one follows a core equity, multi-cap approach, while the other, Phoenix, takes a smaller mid-cap approach. In both cases, we are significantly overweight in three key sectors. Firstly, we are optimistic about industrials, including bearing, CapEx-oriented, and defense companies. With the Make in India initiative gaining traction, we believe this segment will perform remarkably well over the next one to two years. Secondly, we have a positive outlook on the automobile sector. We have already seen a rise in demand for automobiles. With raw material costs either stabilizing or declining, we anticipate that the earnings profile of auto companies will remain quite reasonable for the next financial year. Thirdly, we are particularly interested in residential real estate and invest in this segment through building materials. We expect the building materials sector to exceed expectations and provide strong earnings performance in FY24.

Financial Sector Impact on the Indian Market

The financial sector is currently facing a crisis globally. Some well-known banks, such as Silicon Valley Bank, Signature Bank, and Credit Social Bank, are under pressure, along with many other global banks. The current situation in the financial sector is a matter of concern for the global economy, and the impact of the crisis will undoubtedly be felt in India. However, it is important to note that Indian banks are relatively well-positioned to weather the storm, thanks in part to the measures taken by the Reserve Bank of India (RBI) and the Indian government to strengthen the country's banking sector over the past few years. For example, the RBI has implemented several measures to improve the stability and resilience of India's banking system, including implementing stricter regulations and capital requirements for banks, enhancing supervision and risk management frameworks, and introducing measures to address non-performing assets (NPAs).

Additionally, the Indian government has implemented a series of reforms to improve the overall health of the banking sector, including the merger of several public sector banks and the establishment of a centralized asset reconstruction company to address the issue of NPAs. While India's banking sector is not immune to the global financial crisis, its overall resilience and the measures taken by the RBI and the Indian government suggest that it may be better equipped to weather the storm than some other countries. Nonetheless, continued vigilance and proactive measures will be necessary to ensure the stability and health of India's banking sector in the face of ongoing challenges.

The banking industry is known for its resilience, and we must credit the Reserve Bank of India (RBI) for its effective checks and balances. It's worth noting that in India, the deposit mix leans more towards retail deposits than wholesale deposits, which is the opposite of the trend in global banks. Retail deposits are more stable and less prone to sudden withdrawals. Additionally, the gross Non-Performing Assets (NPA) ratio, which peaked in 2018 at around 13% at the industry level, has come down to 5%. Moreover, the provision coverage ratio of most banks is quite high, indicating a healthy P&L and balance sheet. Another factor to consider is the Current Account Savings Account (CASA) deposits, which are low-cost deposits. Many banks have a significant percentage of their deposits as CASA, with some holding as much as 40% to 50%. Considering these four parameters and the rising interest rates globally, India's banking sector is relatively immune. Our interest rates have only risen by an average of 200 basis points, whereas, for example, the Federal Reserve's interest rates have gone up from 1% to almost 5% now.

Mr. Surjitt Singh Arora discussed several other questions in detail during the interview. Click the appended link below to relive the entire interview:

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