GDP growth, political stability and the strong influx of retail investors have supported the domestic market. Over the past year, domestic retail investors have been a significant force in terms of direct and indirect investments in our equity market, and these large flows have also aided in the relative outperformance of the Indian market, says Shyamsunder Bhat, Chief Investment Officer, Exide Life Insurance. In an interview with MintGenie he shared his views on markets and the sectors he is positive on.
Edited excerpts:
What is your view on the relative outperformance of the Indian market? Can it sustain for the long term? Can India decouple from the US market for a long time?
From the perspective of the next couple of years, India does appear to be in a sweet spot relative to most other markets - from the perspective of GDP growth, political stability and leadership, forex reserves, currency and (absence of) geopolitical issues. The confluence of these factors could work to India’s advantage in enabling a higher weight in global market indices and eventually in global portfolios.
India has also managed the pandemic crisis relatively better than some of the other large economies, from a fiscal perspective. It is presently better placed relative to the US, in terms of the difference between inflation and interest rates (which is now small as compared to that in the US) and this should help in an earlier end to the rate-hike cycle in India.
Over the past year, domestic retail investors have been a significant force in terms of direct and indirect investments in our equity market, and these large flows have also aided in the relative outperformance of the Indian market, apart from all the other factors detailed above.
However, considering the reasonable exposure to global consumption, global investors as well as global commodities, it is difficult to expect a long-term decoupling of the Indian economy and market, though it does appear possible for it to have a relative long-term outperformance.
The market seems to have discounted healthy economic growth. What is your view on the economy-centric sectors?
An environment to foster growth has been put in place by the current Government for the past two years (a very gradual glide path of reaching a fiscal deficit of 4.5% only much later, viz by FY25-26) with a focus on higher capital expenditure and with funding of growth through borrowing rather than through higher tax rates.
This approach continues to be a structural long-term positive for our equity markets. Corporate balance sheets, too, are healthier now, which should enable companies to undertake capex (wherever viable in the longer term from the domestic or global demand-supply perspective).
We are positive on some of the economy-centric sectors such as in some of the companies across financial services (particularly with the expected pick-up in credit growth along with steady to improving margins and lesser stress on asset quality), along with specific companies in the industrials, defence, chemicals, agri and hospitals sectors.
We are, however, underweight on some of the other equally economy-centric sectors such as auto (as valuations have now run up significantly), consumer goods (as valuations are stretched) and cement (as competitive dynamics in the industry could change, in addition to the difficulty in passing on higher costs without impacting volumes).
Can we bet on the IT and pharma sectors considering their low valuations?
We are presently neutral on the IT as well as the pharma sectors from a weightage perspective (relative to the weights of these sectors in the Nifty 50 benchmark index).
While these two sectors have underperformed during the recent sharp-up move in the markets, their valuations are not particularly low, when seen in the context of the modest earnings growth expected over the next two years.
Both these sectors have a large dependence on the developed economies (except maybe a few domestic-focused companies in the pharma space) and therefore we would continue to maintain a neutral stance on these sectors at the present juncture.
There has been a substantial influx of retail investors in the Indian market in the last few years. What has facilitated their rise in India?
Over the past few years, domestic retail investors have increasingly shown maturity in terms of their discipline toward equity investing.
Over long periods, equities have tended to be the highest-yielding asset category from a post-tax perspective, yet comprising only a small component of allocation in savings for most individuals.
The awareness of the same has been increasing and has been reflected in the increase in demat accounts and mutual fund folios in the past couple of years. This trend is therefore likely to continue to be a long-term structural tailwind for Indian equities.
Foreign investors are buying in the Indian market even as the risk of rate hikes looms. Can rate hikes break the ongoing FPI trend?
India appears to be relatively better-placed than most other large markets on various factors.
While we are presently witnessing some renewed buying from foreign investors (aided by possibly some fund-raising by emerging markets ex-China funds), this is being seen after several months of relentless selling by foreign investors earlier on in the current calendar year (which was due to higher valuations and redemption pressures).
But with valuations in the expensive territory and rising interest rates, we could again see a drying up of FII inflows (or a resumption in outflows).
On which sectors are you bullish about at this time? Which sectors would you like to avoid?
From an overall market perspective, the valuations of the Nifty50 index are high relative to historical averages, as well as high relative to the earnings growth expected over the next two years.
While this might be sustainable in a high-growth, high liquidity scenario, that is presently not the case and therefore the margin of safety is somewhat low at the current levels, as these valuations have to be seen now in the context of an environment where liquidity could be tightened at a more rapid pace from September in the US, and where global growth expectations are set to go lower with increasing recessionary risks in the EU and US. However, stock-specific opportunities continue to exist.
We are overweight on financials (largely banks, and also select NBFCs, housing finance and insurance companies), healthcare services (hospitals), domestic capex-oriented sectors (industrials/defence/PLI beneficiaries) and sectors benefiting from export opportunities (chemicals).
There are no sectors which we are avoiding per se, but we are underweight on auto, consumer goods and cement (among the domestically oriented sectors) and on sectors such as oil & gas and metals (where the linkages with global developments are high).
Disclaimer: The views and recommendations given in this article are of the analyst. These do not represent the views of MintGenie.
