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DAILY VOICE | Dovish central banks and middling economy an excellent combination for equity investors, says Sahil Kapoor of DSP Investment

At present the index is trading at 21 times 1 year forward earnings and would require earnings to compound at 18 percent to 20 percent CAGR while maintaining such high Price to earnings ratio.

September 24, 2021 / 02:16 PM IST

Sahil Kapoor, Head – Products & Market Strategy at DSP Investment Managers feels India’s growth trajectory is likely to improve going ahead and may provide stable earnings trajectory for equity markets.

Currently, "a dovish central banks and middling economy is an excellent combination for equity investors. That's the backdrop available today," said Sahil Kapoor who has a wide ranging experience across asset class and businesses.

DSP Investment's focus is always on investing with companies which provide good margin of safety on valuations, strong corporate governance matrix and excellent growth opportunity. "At this time we are scouting for opportunities in infrastructure, realty, industrials and core sectors in addition to existing performers from BFSI, IT and consumer discretionary space," Kapoor said.

Q: What is your reading on Federal Reserve Meeting? Do you think tapering will get delayed? What does Dollar Index and Bond yield movement indicate?

The Fed has added a tapering of its bond purchases in its policy statement. This is unlike the previous occasions when they had just spoken about it in interviews and interaction. This means Fed is likely to begin taper in November or December 2021. It also highlighted that it would want to finish the taper by mid 2022. The pace is faster than I expected and market consensus. I don't see any delay in taper as Fed has increased its inflation forecast by 70 to 80bps.

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The US Dollar and bond yields have been steady after the announcement. In fact the fed is likely going to taper into a bit of a slowdown as indicated by high frequency indicators. While the rest of the developed works and part of emerging markets remain in easing mode the US Dollar may strengthening. The bond yield curve, the 10 – 2 bond yield spread, actually contracted after the announcements yesterday. This indicates that taper is likely to put marginal pressure on growth and would weigh on risk assets.

Q: Do you see any impact of Evergrande crisis on Indian real estate? Is it a deliberate move form China?

Real estate has been the target for stimulus after the global financial crisis in China. The Chinese government has used this sector to prop up its economy guzzling record amounts of commodities and resources. It accounts for 29 percent of GDP in China which is extremely high. Only a few countries like Ireland & Spain were at similar levels before the Global Financial Crisis (GFC) of 2008. Even US at the peak had real estate at 15 percent of GDP contribution. China has constructed a lot & needs a new growth engine which will be difficult to replace. This appears to be a structural shift that the government in China is trying to engineer. In past it has succeeded against all odds, but this is likely to lead to a slowdown for medium term.

Q: Considering the expected economic & earnings growth, do you think the BSE Sensex and Nifty can be doubled from current levels by 2025?

While it's a tough task to arrive at a number target for indices for 2025. we can look at earnings and valuations. At present the index is trading at 21 times 1 year forward earnings and would require earnings to compound at 18 percent to 20 percent CAGR while maintaining such high Price to earnings ratio. As a combination this appears a tall ask. However India’s growth trajectory is likely to improve going ahead and may provide stable earnings trajectory for equity markets.

Q: Have you spotted any themes which have to be part of portfolio from here on, and why?

A dovish central banks and middling economy is an excellent combination for equity investors. That's the backdrop available today. We like growth companies which continue to deliver high quality of earnings. Our focus is always on investing with companies which provide good margin of safety on valuations, strong corporate governance matrix and excellent growth opportunity.

At this time we are scouting for opportunities in infrastructure, realty, industrials and core sectors in addition to existing performers from BFSI, IT and consumer discretionary space. We believe a mix of growth and lower interest rates are ideal for these themes.

Q: Finally the government announced moratorium of four years on payment of adjusted gross revenue dues for cash-strapped telecom sector. How will this moratorium help the sector and do you think it can solve the problem of the sector? What should be done to solve the sector's crisis?

Since these relief measures are net present value (NPV) neutral they don't significantly change the prognosis. It does however give more breathing space to telecom sector. It's also an opportunity for the promoters of struggling telecos to infuse cash – without which the firm could keep losing market share and debt servicing capability. This also means that stressed telecos can manage with lower average revenue per user (ARPU) hikes. ARPU growth trajectory could remain muted but market share gains can continue for the players who are doing well.

Q: Several experts expect the bullish trend to continue for atleast next couple of years to four years. Do you agree with their view and why?

The underlying trend for stocks prices can remain positive because we are still in the early cycle for the economy. But the valuations are rich in some pockets at this time and we might see a phase of consolidation. It's like stocks have moved the mid cycle while the economy remains in early cycle. This may take sometime to get resolved and lead to corrections and consolidation for sometime.

Q: Metals sector was the biggest outperformer in FY22 so far with 44 percent gains. Do you think the rally can extend further in coming weeks or is it the time to be cautious on the segment?

There are signs that metal prices have plateaued and are witnessing some correction. This is likely to have a sobering impact on some metals and mining companies. However the de-leveraging cycle is well underway and metal sector companies are showcasing excellent profitability profile and capex discipline. The opportunities will continue in the sector.

Q: Will the chip shortage issue be a spoiler for auto sector in current festive season? Also what is your view on the PLI scheme announced for the sector? Is it the time to add these stocks to portfolio?

The chip shortage situation has got aggravated given Covid lockdowns in South Asia and early signs are pointing to a likely to impact October-November production. We expect this to be a spoiler for the festive season.

PLI scheme – there is a marked difference between the initial thought from the government production linked incentive (PLI) and the way the final policy has come out to be. Not only have the incentive amount been halved but also the allocation is now towards Electric Vehicles and Advanced Automotive Technologies (read import substitution). As such as against the initial expectation that PLI will boost exports, the government is likely seeing it as a step forward from the FAME (Faster Adoption and Manufacturing of Hybrid and EV) subsidies and is now incentivizing electric vehicle (EV) production and advanced technologies.

The auto sector has underperformed this year given the problems of sharp increase in commodity prices, wave 2 lockdowns and now the semi conductor shortage. We expect these issues to be behind us in a couple of quarters. We like select four wheeler names and Auto ancillaries from a cyclical recovery point of view.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
first published: Sep 24, 2021 08:05 am

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