Valuations at around 19 times one year forward capture most of the positive tailwinds in India. Markets would now need earnings growth delivery to outperform from these levels significantly, said V Srivatsa, Executive VP & Fund Manager – Equity, UTI AMC in an interview with MintGenie.
What is your overall view of the market? Can we say Nifty is poised for scaling the 20k mark in the first half of 2023?
As a matter of policy, we do not give any target for either benchmark indices or stocks. India has significantly outperformed global markets on the back of a strong growth outlook, efficient management of external accounts and allocation from other emerging markets facing headwinds.
Given the weakness in commodity prices and the spectre of global recession, we have reasons to believe that inflation will be under control in the coming quarters which will set the stage for rates to pause and for improvement in earnings.
However, valuations at around 19 times one year forward capture most of the tailwinds in India. Markets would now need earnings growth delivery to outperform from these levels significantly.
How do you perceive India’s macro condition? Everyone is talking about the opportunities but what are the challenges that can spoil the party?
The biggest risk in India is largely external in the form of elevated commodity prices for a prolonged period of time which would cause high current account deficits and put pressure on the rupee apart from having its impact on higher interest rates.
Given the stable government and the slew of reforms in the last eight years, we see limited risks to growth unless there is a deep recession in the global economies.
We see high elevated commodity prices and liquidity-related risks as the big spoilers to the party.
How can a recession in the West impact the Indian market? Can there be a knee-jerk reaction?
Recession can impact in two ways – first is global related weakness will impact export-oriented sectors such as Information technology, pharma, engineering goods, and automobiles which would in turn put pressure on the underlying sectors which would impact the economy.
Eventually, a prolonged recession would create demand weakness in the economy which would translate into lower earnings growth.
Also in terms of index, the share of globally oriented sectors such as metals, oil & gas refining, IT, and healthcare, is higher which would cause a higher slowdown in growth.
In a global recession, the flows turn risk off affecting flows in high-risk equity especially emerging markets equities.
Indian market is at a premium valuation. Should investors be cautious?
At this juncture, the other emerging markets are trading at a 30-50% discount to the Indian market, which is at the highest level.
While high valuations are a cause of concern, the positive momentum in earnings and sentiments is in favour of Indian markets.
We believe that investors should stay invested in equity markets and make further entries through a systematic investment plan (SIP).
What sectors can give healthy returns in the next one-two year? Can we make contra bets on sectors like pharma?
We believe banking and automobiles are the sectors to bet on in the next couple of years.
In the case of banking, the sector has struck a purple patch in terms of high credit growth, stable margins and cyclical low credit costs, which would pave the way for high earnings growth and valuations are also reasonable from a long-term perspective.
In the case of automobiles, we see strong cyclical recovery across two-wheelers, four-wheelers and commercial vehicles which would benefit the sector. Also, the fall in commodity prices is a big positive.
What are your expectations from the Union Budget 2023?
Our expectations would be higher allocations towards infrastructure-related projects and further rationalisation and simplification of direct taxes.
Disclaimer: The views and recommendations given in this article are those of the analyst. These do not represent the views of MintGenie.