B Gopkumar, MD & CEO, Axis Securities expects the market performance to remain range-bound in the near term. In an interview with MintGenie, Gopkumar believes the bulk of the FII selling is already over, and its quantum is likely to reduce, albeit with some volatility. Going ahead, he said that banks, automobiles, discretionary consumption, and industrial themes look more attractive for the near term over export and commodity sector themes. He advises investors to use dips in a phased manner to build a position with a view of 12-18 months in quality companies, where the earnings visibility is very high.
Edited Excerpts:
The market is showing clear signs of recovery since the second half of July. Do you see this trend continuing in August? What are the key reasons for the shift in trend?
The Indian market performance showed resilience in the last month and outperformed most of its global peers. We have seen Nifty 50 recover by 12% from the bottom (since 17th June). Mid and Small Cap indices delivered an excellent performance, recovering higher than the Large Cap over the same period. The recovery was due to tapering in the FIIs outflows, with a cool-off in commodity prices, including base metals and agri commodities. Due to the normal progression of the monsoon, we expect robust demand in the upcoming festival season.
Further, a decline in the key commodity prices from 52 W high brings confidence towards the margin recovery for the corporate sector. With this development, we expect the earnings performance to improve, backed by robust demand.
In the last month, we have seen the market narrative shift from inflation concern to a cool-off in the inflation expectation in the next one or two quarters. There has been a relief rally in the market, to some extent. However, macroeconomic developments, including the ongoing Russia-Ukraine conflict, the trend in commodity prices (including oil), the direction of inflation, and growth in the developed world, will continue to influence the market in the near term, limiting the upside for the market.
Keeping these developments in view, we expect the market performance to remain range-bound in the near term.
Now that the FIIs have started buying again, what factors going ahead could keep them positive, and which ones could disrupt this trend?
FIIs turned net buyers for the first time in July 2022 since October 2021. FIIs have pulled a significant chunk of the easy money from the Indian market which they had pumped in after the Covid-19 crisis in March 2020. They have pulled $32 Bn in FY22/23 out of $37 Bn pumped in FY21. Nonetheless, the pace of selling has reduced in the last month, and on a positive note, FIIs have turned into net buyers’ towards the end of the month.
We believe the bulk of the FII selling is already over, and its quantum is likely to reduce, albeit with some volatility. They would continue to be cautious with the prevailing inflation print and aggressive tightening by the central bank. Overall, we believe once the volatility settles down in H2CY22, the overall fiscal deficit and growth phenomenon will play out, and FIIs will regain confidence in the emerging markets. This development is particularly true for India, as earnings growth and economic recovery will play out in the remaining months of 2022.
How have you formed your portfolio now? What kind of plays do you have in your portfolio in the next three to five years?
India's growth prospects continue to be very strong in the post-pandemic world. Our country might be among the fastest-growing economies in the emerging market basket in the next three to five years. The Indian economy is in better shape, especially the Indian banking system. The trend has improved significantly in the banking sector on the asset quality front leading to a visible improvement in profitability. Balance sheets for the corporates have also improved considerably, with the cumulative net profit of NSE 500 universe for the last four quarters reaching all-time high levels (crossed ₹9.5 lakh crore in Q4FY22).
Overall, the Indian market has entered into an upcycle of earnings, expecting 20% Nifty EPS CAGR growth over FY21-24, which was at a 7% level during FY09-21. We believe the market will follow the double-digit earnings growth in upcoming years. Given this context, banking, the private CAPEX cycle, domestic consumption, and manufacturing, driven by Make in India, could be the best-performing themes in upcoming years.
What themes should investors look at from a three years perspective?
We have seen a cool-off in commodity prices with the central bank's action on front-loading the interest rates, changing the market style over the last month. In the past couple of months, growth as a theme has come back in the market. Growth stocks suffered the most in the recent correction but rapidly recovered over the last three months due to a cool-off in commodity prices, robust domestic demand, and a reasonable valuation after the market correction. On the positive side, given a focus on domestic interest first and India as a domestic consumption economy, local or domestic-oriented themes may perform better in the near term. We believe profitability will shift from commodity producers to commodity consumers. Keeping this in view, Banks, Automobiles, Discretionary Consumption, and Industrial themes look attractive for the near term over Export and Commodity sector themes.
Are you a fan of the banking space after this spectacular earnings season?
We believe the banking space could deliver decent returns in the current calendar year. We also expect a sharp reversal in BFSI stocks which got impacted due to the present volatility, as the outlook for the sector has significantly improved. We could see the improvement of ROE for top-tier banks in the upcoming years. In our opinion, this is the right time to increase allocation towards top-tier private banks with a perspective of two-three years.
What are your thoughts on small caps and midcaps? Do you think the valuations are expensive following the recent rise or is this the right time to buy?
After the recent correction, one should start accumulating quality Mid and Small-caps, where the growth and earnings visibility is high. Historically we have seen that Small and Mid-cap companies tend to grow faster than the large-cap universe in an economic recovery scenario, so this is the right time to accumulate high-quality companies with a view of 12-18 months.
Now that most major earnings have been announced, how do you think India Inc fared in the June quarter?
The overall earnings scenario is holding up reasonably well. While most Nifty 50 companies are either inline or beating revenue expectations, input cost pressure is mitigated partly by calibrated price hikes. Management commentaries were upbeat and guided ease in supply chain constraints with a cool-off in commodity prices. The expectation of recovery towards the upcoming festive season and pick-up in infra projects were the highlights during the quarter.
What sectors are you looking at now post the earnings?
Normal monsoon brings the expectation of robust festival demand. We have seen a sharp recovery in the services PMI for June, bringing confidence towards a strong recovery in economic activities in the post-Covid scenario. We believe the services sector will do better in the upcoming months, similar to Q1 FY23 (Q1 of FY21 and FY22 were painful for services due to Covid 1st and 2nd waves). Q1 FY23 was the first full quarter in the last three years in which we did not see any disruption in the economic activities due to Covid. Given this background, domestic-oriented themes are more likely to deliver superior performance.
After this 8 percent rise, would you advise investors to buy anything fresh or just accumulate on dips?
Keeping the macroeconomic developments in view, we expect the market performance to remain range-bound in the near term. We advise investors to use dips in a phased manner to build a position with a view of 12-18 months in quality companies, where the earnings visibility is very high.
