There has been softening of commodities in Q1 and some of Q2, the effects of which will start getting visible in Q2, R. Venkataraman, Chairman, IIFL Securities said in an interview with MintGenie. He recommends FMCG, utilities, strong private banks, defence, and select auto names, to bet on.
Edited excerpts:
What is your thought about the market? Can the prevailing headwinds make Nifty end in the red for the year?
Year-to-date, Nifty is in the red. Headwinds mainly include global monetary tightening and worsening geopolitics in the form of war as well as continuing supply chain problems caused by China’s strict Covid control and US-China semiconductor issues.
Domestically the economy is on a sound footing but is vulnerable to a bout of inflation that can be caused by a currency slide, which in turn can be caused if there are capital outflows.
FIIs could sell out of equities if there is a global shift away from risk, in which case emerging market (EM) equities and US equities will both see outflows into risk-free assets like US Treasuries. In such circumstances, it would be a brave man who ventures the opinion that Nifty will hold in the short term.
What are your expectations for the Q2 earnings?
There are concerns over margin pressure which can raise worries over valuation. Second-quarter earnings should be relatively strong, as economic slowdown risks from monetary tightening around the globe will take time to manifest.
Further, there has been softening of commodities in Q1 and some of Q2, the effects of which will start getting visible in Q2, as commodity price hedges roll off.
Banks have released reasonably strong growth numbers, and the festival season started early this year, with some part in Q2.
Hence we think there is little risk to earnings momentum in Q2. Private banks, auto, retail, paints, and real estate will be the top-performing sectors in Q2 reporting with PAT growth year-on-year (YoY) being in excess of 30% in most cases.
Are you a believer in the 'decoupling' narrative? A global slowdown will impact India's trade and capital flows while it will also impact commodity prices. To what extent India can ward off pressure?
India is not entirely immune to global pressures. Strong tax collections - thanks to GST and compliance drives strong earnings growth and some bracket creep in personal income tax - have been reasons behind optimism and outperformance.
Incrementally, some degree of multiple convergences may happen – S&P has slid from 22 times to 17 times in the last year, but India has hung in above 22 times.
But on the other hand, real interest rate normalization has been happening much more sharply in the US, with 10-year real yield moving from the -6% to -4% range in the last two months, but there has hardly been any movement in the corresponding Indian real yields.
More of the same is expected in the next six months, so there may be a harsher de facto withdrawal of stimulus in the US, and hence bigger earnings downgrades, and hence India may continue to outperform despite some multiple convergences.
These movements will not be smooth – capital outflows can be sharp, and will likely create a mini shock within the next three months in India.
What sectors are you positive about at this juncture? Please elaborate on your views.
We are inclined to stay defensive, so we would recommend FMCG, utilities, strong private banks, defence, select auto names, etc.
Foreign investors turned net sellers in September and are also selling this month. Why have they resumed selling? Can the trend continue?
As explained above, the risk sentiment can incrementally worsen thanks to rising interest rates in the US sharply, and there can be a phase of earnings downgrades in the US and to some extent in India, which can cause a risk-off sentiment to harden and can trigger FII selling in India.
What is your suggestion to first-time investors? Should they hold cash for the near term? If they want to invest, what sectors can they look at?
First-time investors should avoid ‘timing the market’ and should rather focus on spending time in the market as long-term investors to fully benefit from their investments.
Considering the current global uncertainties, a new investor should ideally invest in equities through mutual fund systematic investment plans and capitalize on any corrections as and when they occur.
Disclaimer: The views and recommendations given in this interview are those of the analyst. These do not represent the views of MintGenie.
