10 hours ago
Macros more favourable for quality growth style than value: Krishnan VR
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If the current trend of slowing government capex growth, lower inflation and recent rate cuts continues, the macro environment is more favourable for quality growth style than value, says Krishnan VR , Chief of Quantitative Research, excerpts from a chat:We have seen improvement in market breadth due to the broad rally among small and mid-caps since March to the extent that both indices have almost recouped from the drawdown witnessed in the first two months of the year. Among factors, high beta and growth stocks have fared better over the last 3 months or high-quality franchises still delivering alpha, or is the market favouring a different style now?Quality focused indices have underperformed so called 'Value' stocks- which appear cheap on valuation multiples- both CYTD and on trailing 3-year and 5-year basis since Covid. However, if one considers a wider definition of quality style as companies having both Quality and Growth characteristics available at decent valuations, then it has held up relatively well in the current fiscal till date. Momentum as a factor has trailed a bit recently, given the sharp change in market direction between risk-on and risk-off over the last 6 months. Investors should always consider diversifying across factors for a smoother ride as individual factor performance can be macros turning globally, is there a recalibration happening in your quant models or factor weights?We prefer quality companies available at attractive valuations. On a relative value basis, quality stocks and some erstwhile consistent compounders look attractive today, considering the outperformance of value and cyclicals since Covid. With a slowing domestic and global economy, companies which can deliver reliable earnings growth are going to be scarcer and have lower risk of valuation non-consensus signals or patterns your models are picking up that the broader market might be ignoring?Like I mentioned before, Value style has been among top performing factors since Covid due to different reasons like topline recovery from lockdown (FY22-23), higher government capex spends, and then from the commodity spike followed by cool-off (FY23-24). However, if the current trend of slowing government capex growth, lower inflation and recent rate cuts continues, the macro environment is more favourable for quality growth style than discretionary names within retail and Autos, could benefit from higher consumer spending driven by lower EMI, easing inflation and reduced income tax outgo from changes announced in the recent budget. For long term investors, companies in the broader financials service sector like insurance, wealth management offer attractive plays on the structural trend of financialization of household assets, which is underway. Our investment approach remains sector agnostic especially vehicle financiers with larger exposure to fixed rate loans are well placed to benefit from recent rate cuts and easing liquidity. NBFCs with significant exposure to unsecured lending should also benefit as credit concerns abate and non-performing loans bottom out. CRR cut is marginally positive for banks though rate cuts could initially drag down their NIMs, as loan book reprices to lower rates and given the competition for IT sector is down around 11% this year versus 5% for Nifty50. So while a case can be made based on relative valuation, I have not seen any new fundamental trigger for rerating. Most largecap IT stocks have broadly delivered single digit revenue growth. Now with the economic uncertainty in the US due to tariffs and policy changes under new administration, the growth guidance remains muted, with most managements striking a cautious note on discretionary demand pickup in 4Q results season.
