In an interview with Mint Genie's Nishant Kumar, Dhananjay Sinha, MD & Chief Strategist, JM Financial Institutional Securities, said the rate hike and exercise of monetary tightening by the US Fed can trigger similar adjustments by other central banks across the world. For the markets, the next story will be earnings cutbacks amid receding surplus liquidity, he said.
Edited excerpts:
US Fed rate hike has happened and one of the most important events for markets has now passed. What are the next big triggers for the short to medium term?
The FOMC announcement is the most important event for the market than just the first 25bp rate hike as it foretells the steepest monetary policy normalization the market may have seen in 3 decades. The statement also guides for a steep downscaling of US growth projection by 120bp to 2.8 percent. Earlier OECD has indicated similar revision for global growth. These are beginning to trigger growth scaling down of growth projections the world over even as inflation trajectory is getting scaled up significantly.
The market seems to have digested most negatives. Do you think the peak pessimism is behind us and we have fewer reasons to worry about?
The market has certainly scaled-down risk aversion sentiment due to the peak out of the Russia-Ukraine conflict, easing of crude oil prices, and news about China’s adopting another stimulus package. There appeared to be some unwinding of over-cautious positioning ahead of the FOMC address, which also contributed to the decline in market risk perception. But that does not take away from the fact that the war situation still has several flashpoints. Also, we think the focus will shift to earnings projections, which appear optimistic. The front-loading of monetary normalization by the Fed can trigger similar adjustments by other central banks across the world. So the next story will be earnings cutbacks amid receding surplus liquidity.
What are your views on IT and pharma? Will you recommend investors to look at them amid the rupee's weakness?
We are constructive on the IT sector as we see the sector having maximum earnings visibility. The consensus earnings expectation for the sector is around 13-15 percent growth in FY23 and is least exposed to downside risk. Corporate guidance on IT spends by global companies and the IT vendors in Feb’22 was fairly positive. This was prior to the Ukraine-Russia conflict. However, we believe there is still a chance of reasonable revenue growth traction of at least 10-12 percent. Select names in BFSI have guided for 20 percent growth in IT spend. Some of the earnings concerns can be neutralized by the rupee depreciation.
What sectors look attractive to you in this market?
It is possible that the unwinding of risk aversion may trigger some risk on positioning in the near term. The upside in our Nifty range is at 17,500 with a downside of 15,000. But we are positioning for earnings cuts (lower growth) and valuations risk (tightening global liquidity)over the next 6-12 months.
Accordingly, sectors that can be exposed to high valuation and earnings risks are cement, NBFCs, BFSI, industrial and capital goods, realty, and mid & small caps. Sectors that may be low on risks are FMCG, utilities, IT, and pharma. Sectors that are exposed to moderate to average risk are autos, infrastructure, oil & gas, metals, consumers, and Nifty.
What are your views on Q4 earnings? Do you expect a hit on the growth and margins of Indian firms?
Following the Q3FY22 results, Nifty50 earnings per share (EPS) estimates continued to see upgrades to the tune of 1.4-2 percent translating into growths of 39 percent, 19 percent, and 16 percent respectively for FY22E, FY23E, and FY24E.
These are significantly optimistic given our view that India’s real GDP growth could structurally align to a 4-5 percent range over the medium term, in line with the scaling down of global growth, high inflation, and still weak demand conditions. We assess the consensus projections to ascertain the risks following our previous research that saw a 20 percent downgrade in Nifty earnings. Sectors with higher earnings vulnerability are larger index components: banks & NBFCs, oil & gas, autos; smaller sectors: cement, metals (steel), infrastructure; non-Nifty: industrials and PSU banks. Sectors that are moderately at risk are consumer staples, pharma, utilities, upstream oil & gas and IT.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
