The market is expected to remain volatile and the trend of buying on dips may continue, said Sandeep Bhardwaj, CEO - Retail, IIFL Securities, in an interview with MintGenie's Nishant Kumar. He also shares his views on the IT sector's Q4 performance and revealed why he prefers only market leaders in the banking sector at this juncture.
There are so many short-term headwinds for the market such as inflation, the hawkish Fed and RBI, the ongoing Russia-Ukraine conflict as well as rising bond yields. What are your views on markets?
Markets have been under pressure for some time. One of the major reasons is that inflation is rising globally.
The US, in March, recorded an 8.5 percent CPI inflation which was the highest in four decades. This led to the US 10-year bond yield rise to 2.93 percent.
The yield on 10-year US treasury inflation-protected securities has turned negative, and the inversion of the US treasury yield curve has historically acted as a warning signal for decades.
Another reason is the rising Covid cases in China and even in some parts of India.
The complete lockdown in Shanghai has led to a supply chain crisis as there are a huge number of ships and containers stuck.
Also, China’s defense minister has told the US that Taiwan is a part of China and no one could change that, thus openly going against the US. The Russia-Ukraine war is showing no signs of settlement which is further escalating the volatility.
Hence, as long as these headwinds don’t reduce, the volatility is likely to persist. For the short term, the level to watch out for is 16800 on Nifty which is where the 200-day exponential moving average (EMA) is situated on the technical charts.
We expect the market to continue to be a buy-on-dips market as the current volatility will provide long-term wealth creation opportunities for investors who missed the previous rally.
Domestic equity funds witnessed strong inflows in FY22 while Foreign Portfolio Investors (FPIs) have been selling incessantly. What do you make of the trend? Can Domestic Institutional Investors (DIIs) save the market from FPI selling for a longer period of time?
Foreign Instituional Investors (FII) selling has been the largest since the Global Financial Crisis. FII ownership is at an eight-year low. However, outflows have been offset by stronger DII Buying.
Coming to FII/FPI, there are several types of investors within them.
These include Pension funds - very long-term horizon (multi-decades) Hedge funds & AIF - very short-term horizon (3-6m) EM funds - buy/sell as basket including India ETFs - MSCI, FTSE. All these investors have different investment horizons, objectives and strategies for investment.
Because so many investors are involved, they rarely act in unison. To assume that all the FPIs are selling at the same time and exiting India is too overdramatic.
The provisional data released every evening does NOT represent the actual net FPI flows into India.
This only includes the NET inflows into secondary markets as reported by the custodians to SEBI. The real net flows = investment in primary market + debt securities.
Secondary market selling has been compensated by primary market buying in most years. They also have to maintain asset allocation like most investors. Selling figures does not mean they are exiting India.
They might be shifting from equities to debt securities or from secondary market to primary market. Also, FPI’s risk-reward is very different from normal investors as they have to manage the currency risk as well.
Hence, one should not get too nervous about seeing the FII selling figures. European equities have also seen the largest outflow ever, which can benefit us in the long run.
The DII inflow is likely to continue its uptrend as more and more retailers participate in the financial market through the SIP route.
How do you see the ongoing earnings season for the IT sector? What are your preferred bets from the sector?
The key takeaways from the recent IT results are:
(1) Demand environment remains healthy, with some normalisation on a sequential basis due to a tough base.
(2) Deal activity was dominated by smaller-size deals, with 60 percent of the deals this quarter in the US$5-10m range.
(3) Attrition level in the industry remains at record highs, creating pricing & delivery challenges for both, enterprises and providers.
(4) Pricing for T&M deals has seen a 4- 7 percent increase across the board and as high as a 15 percent rise for in-demand skills, while pricing for managed services deals is declining at a slower rate than earlier.
(5) Rise in large-scale digital transformation programs and associated adoption of cloud platforms have brought cyber security to the forefront of most business and technology discussions.
(6) Macro risks around inflation and geopolitical tensions have worsened over the last quarter which could impact technology budgets.
Preferred bets from the sector are Infosys, LTI, and Mindtree.
When it comes to financials, most analysts prefer to stick to large private players. Can an investor look beyond HDFC, ICICI and SBI in the financial sector?
The reason why most analysts prefer to stick to HDFC, ICICI, and SBI is because of their safety compared to the other players.
They have been in the business for decades and have seen several business cycles and came out victorious. The group companies are also doing well in the insurance and other lending space.
And in these trying times, it is better to look at the market leaders which are performing well, than to look at higher risk growth stocks. Hence, it is not required for an investor to look beyond these companies.
RBI in its state of the economy report has highlighted the risk of widening trade deficit and capital outflows. At this critical juncture, can the talks of rate hikes derail economic recovery? Do you expect the RBI to lift rates in June policy meet?
The central banks have been behind the curve in controlling inflation. US CPI was recorded at 8.5 percent in March which was the highest in four decades, while Germany’s Producer inflation shot up to a record 30.9 percent in March. India too has recorded a 14.55 percent WPI in March, which means that WPI has been in double-digit territory for twelve consecutive months.
Controlling inflation would be a priority now to keep the economic recovery on track. Thus, we expect a 50 basis points (bps) rise in rates for this year and a further 100 bps rise in the benchmark rates next year.