There are 4 components of GDP. Which of these is likely to prove the most resilient going forward?
a) Investment growth - This is clearly under threat with rising interest rates and commodity price inflation threatening margins. Domestic savings rate is going to spiral down this year as govt fiscal deficit expands and capital flows are slowing down, so who will finance the investments? Stay away. When a train travelling at 150kmph breaks suddenly, the effects are not pleasant on the commuters.
b) Domestic Consumption growth - This should weather the storm better. Stay away from interest rate sensitives (automobiles). FMCG, telecom, media, retail might do better - but are stocks properly priced? Financials - there has to be a blowup somewhere as credit cycle turns. ICICI is my prime candidate for that . But at 550 - 1.3x P/BV - is the stock interesting? Remember that unlike the west, Indian banks raised significant capital last year, so they are much better capitalized.
c) Net Exports - Rupee is structurally weak. India runs a current account deficit (like USD) and needs capital inflows to support rupee (like USD). Rupee is weakening today (due to widening current account deficit and capital outflows) when RBI is increasing interest rates to battle inflation, and might weaken even more when RBI cuts interest rates 1-2-3 years out - when inflation comes under control, growth slows down and investors take time to rediscover their love for India. Of course a big variable will be oil price.
Problem is - customers are also slowing down. US, UK, Europe are having difficulties. Need to bet on exporters with significant leverage to rupee depreciation, high margins, proven business models. Basically tech.
Tech has huge BFSI exposure and has a potential demand side problem. There are going to be blowups in tech too. Need to wait for those days. Next big event here is Cognizant earnings and whether it cuts its 38% rev growth guidance in the next 2 weeks.
d) Govt Expenditure - Not the time to play govt expenditure growth stories, as fiscal deficit goes through the roof because of oil and fertilizer.
Also as a policy, I am never going to invest in any PSU from here on. I sold HPCL last week - a 4 year investment with -50% returns (excluding dividends), Bank of Baroda - 3 year investment with -10% returns (probably breakeven after dividends). Union Bank is the only one left and I will exit that soon enough. As govt fiscal deficit expands, it can do bizarre things to expropriate the profits of these companies.