What should be the tactical allocation towards equities? What are the sector overweights and underweights that you would recommend right now?
The asset allocation is a function of an individual’s age, income, as well as taking risk tolerance ability. So, it is very difficult to give a blanket recommendation that will apply to all. But I would say that for somebody who is in mid-40s to mid-50s the age bracket I am in, I would say 70% equity, 30% fixed income that is what I would just put out as a number if I had to put it out, but it has to be tempered by risk tolerance, it has to be tempered by other considerations for each individual investor.
Within sectors, I think manufacturing is what I am quite positive about and within that autos and pharmaceuticals in particular because you will see a significant tailwind to margins from normalising raw material costs.
I think it is already visible in the March quarter numbers and as that factor continues to drive earnings over the next year or so, you might see re-rating in these sectors because these sectors have not really done as well as defence-related manufacturing has, for example, where I think valuations are starting to become quite stretched.
So, I think over the last one year it has been railways and defence-related manufacturing that has helped, I think consumer-oriented manufacturing is where I would be significantly positive. I am also reasonably constructive on the banks where I think the commentary has been more about the worry of compression in NIMs and I think compression in NIMs will be offset by credit growth. So, overall, I do not see earnings disappointing even for the banks over the next year and the stocks have not done much post the results. I think that would be an area where I would continue to be reasonably constructive.
What about IT because we have not really touched upon that? There are two sides to it. One, that we are seeing a lot of disruption and then there has been a lot of innovation as well that has taken place. From a valuation standpoint, putting all of these factors together, what is the stance on IT?
After almost one-and-a-half years of underperformance, I was looking forward to the March results to frankly take an overweight stance. But the commentary from the big players has left me a little bit colder. And I think if you look a little bit deeper and see some of the smaller stocks, they have reported good numbers and good traction in business and recovery in margins.
So, I think it is becoming almost a tale of two cities where smaller companies are able to find their niches and do well and the larger companies are struggling a little bit both on business visibility as well as margins.
I think an additional worry for me in IT is the outlook for the US dollar. US dollar typically does provide a little bit of a tailwind to IT earnings and I do not think that tailwind is going to be visible for the next 12 months and this ChatGPT, artificial intelligence could it prove to be the undoing of IT services? I do not know. It is too early to say, but I have been reading various blogs and statements from various people who are kind of doing things with artificial intelligence that have never been done before which arguably could take away from some of these services business for IT services companies.
I do not know how that will play out. I really have no idea, but it is a risk worth keeping an eye on. So, if I put all of this together, it still does not give me the confidence to go overweight on IT services.