"One needs to be very stock-specific over the next year rather than generalise, as there are headwinds for some largecaps as well, while there could be select mid-sized companies which could do better than largecaps," said Shyamsunder Bhat, CIO at Exide Life Insurance in an interview with MintGenie.
Edited excerpts:
We are almost done with the major Q4 earnings. What is your view on the Q4 numbers of India Inc? For many analysts, uninspiring earnings were one of the triggers that kept the market subdued in the last couple of weeks. What sectors disappoint you?
The overall trend in earnings for Q4 has been in line with expectations, with a 20%+ earnings growth (year-on-year) in the NSE Nifty 50 universe. While this overall growth figure is strong, it needs to be viewed in terms of the composition of this growth, as this has been driven by the BFSI sector, along with some stocks from oil & gas, IT, metals and pharmaceuticals.
Earnings have disappointed in cement, industrials and FMCG on a broad basis. Individual stocks though in various sectors have exhibited margin pressure.
It is the outlook for earnings growth in the current year (FY22-23) though, which is uninspiring for many sectors, and a concern. The earnings growth in FY22-23 and FY23-24 could moderate to a range of 10-12%, with the higher base of FY21-22 and a likely difficulty in the ability of corporates to pass on their higher costs (unless demand picks up strongly).
What should investors do with mid and smallcaps in this market? Isn't it wise to stick to largecaps in a volatile market?
Inflation has emerged as the largest concern this year. Within impacted sectors, larger companies are better poised to gain market share from the mid-sized ones, in terms of their ability to absorb a part of the inflationary impact.
So broadly yes, largecaps are likely to fare better over the next year. However, one needs to be very stock-specific over the next year rather than generalise, as there are headwinds for some largecaps as well, while there could be select mid-sized companies which could do better than largecaps.
Metal stocks have been under strong pressure in the last few days. After this sharp correction, the valuation of the sector is down now but inflation remains a concern. What is your take on the metal stocks? Should one consider them for buying at this juncture?
Cyclicals such as energy and metals are sectors which need constant monitoring by investors and are difficult to forecast. Valuations of the metals sector are now appearing reasonable post the sharp correction, however, we remain cautious due to the uncertain outlook for international prices which are being influenced by geopolitical factors, the situation in China, the demand environment in the face of rising interest rates, and finally government action (as witnessed last week in the case of steel).
The Ukraine war, aggressive rate hikes and China lockdown have hit the prospects of global growth. India, too, is likely to face the heat as several rating agencies have cut their growth forecast for the country. Should we be seriously worried and cut our exposure to equities?
Yes, we are witnessing cuts in forecasts for global growth, and for the GDP growth in India as well. However, despite the cut, India is likely to post a relatively higher GDP growth compared to most other large economies.
Similarly, even though our forex reserves have dipped from the peak level, these are comfortable. India is likely to continue to be favoured by FIIs in the longer-term, relative to other markets.
While we have been witnessing large FII outflows over the past few months due to a combination of factors (primarily the reduction in global liquidity and the stretched valuations) this need not be construed as a change in the stance of FIIs towards Indian equities.
Asset allocation would vary depending upon the age, risk appetite, time horizon and income /liquidity requirements of an individual. If an investor is not likely to have income/liquidity requirements over the next couple of years, then a cut in equity exposure at current levels may not be warranted.
As an asset class, investment in equities continues to be among the very few options for retail savers to earn tax-adjusted returns in excess of inflation over the longer term.
When there are too many headwinds for the market, investors are confused as to what to buy? How are you investing in this market? What are the sectors you are betting on at this point in time?
There are multiple headwinds of a risk of earnings downgrades, high inflation, reduction in liquidity and rising interest rates, as well as the uncertainties around the duration and extent of the Russia-Ukraine conflict.
The fiscal implications of the reduction in central excise duties on petrol and diesel, along with a potential shortfall in disinvestment/privatisation receipts, is that we could either see a further increase in borrowings, or a cut in spending on capex (as higher tax receipts may not be able to compensate for the shortfall). As we progress during the year, this will be a key monitorable.
The banking sector is well-poised and is likely to do well in terms of margins in a rising interest rate scenario (as loans are likely to be repriced higher at a faster rate than deposits) and with credit costs under control.
Rural growth has been a concern in the recent past, but with higher agri-prices and the possibility of a good monsoon, we could witness a revival over the next few months, benefiting some specific sectors.
The auto sector has borne the brunt of metal price-led inflation over the past few quarters, and could now become a beneficiary of the reversal in metal prices.
We also believe that the recent sharp correction in IT stocks has resulted in valuations becoming reasonable (the demand environment is presently strong. Going forward, a slowdown in global growth may not materially impact IT spending; and the pressure on margin may be partly offset by the strengthening US dollar).
Thus, while investors need to brace themselves for a continuation of volatility in the near term, the recent sharp correction in some of the sectors has resulted in opportunities for long-term equity investors who are willing to look beyond the next couple of years.
Disclaimer: The views and recommendations made above are those of Shyamsunder Bhat and not of MintGenie.
