Devender Singhal, Executive Vice President and Fund Manager at Kotak Mahindra Asset Management Company, said in an interview with Moneycontrol, that the current corporate earnings season has generally shown positive outcomes, with more companies surpassing estimates than falling short of them.
At Kotak AMC, they don’t expect any cuts in earnings estimates for Nifty50 companies for FY24, says Singhal.
On state elections, he said "One may not see too much impact of the state election results on the equity markets and people may quickly focus back on the upcoming general election results for cues."
Singhal has more than two decades of experience in equity fund management and research to his credit.
Q: What is your take on US Federal Reserve policy meeting? Do you think the Fed will not hike rates now onwards but remain at current levels for 2024?
The pause that which Fed has taken for now is a way to reflect that they think that the policy decisions are working in the direction intended. It is also a reflection that there could be a lag effect of the hike in policy rates on the intended inflation. This is no way a surety that they think that it is the end of the rate hike cycle.
It would all depend on the cooling of the inflation and the supply side issue on the labour side. So, it is difficult to say that the Fed may keep the rates up for longer. Neither does it imply that they may not cut the rates if they see the inflation cooling off for the entire 2024.
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Market is for one expecting that somewhere in 2024 there may be a rate cut happening towards the end of the next calendar year.
Q: The market already corrected 5 percent from its record high. Do you expect further 5 percent downside from here on?
The recent correction in the market is a good opportunity for market to consolidate and weak hands to get out of the market. The 5 percent odd correction in the market along with the quarterly numbers coming is making the market valuations more reasonable.
Any further decline in the market should be used up as an opportunity to cut underweights in the equity allocations.
Q: Sectors that will attract a lot of interest from investors in current equity market turmoil....
A volatile market makes the investors look towards the safer or perceived less volatile sectors like consumption and utilities. These are the sectors where the earnings visibility is high and hence the corrections are lower. We expect these sectors to attract buying in the current fall.
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Information technology sector also has a high free cash flow generation and is also perceived as a safe sector. We do find valuations becoming attractive in the IT sector after the recent underperformance.
The general elections are also round the corner. We expect increased spending by the government on infrastructure to drive the bottom of consumption.
Q: Do you think the spike in US bond yields is the major and only reason for sell-off in equity markets than Israel-Hamas war?
The US bond yields have been rising for sometime and market has been moving up during the same period over the last six months. So, it is difficult to say that the current fall in the market can be attributed to the spike in interest rates in the US Economy. Something similar happened with the start of the Israel-Hamas war and the direction of the market was unclear at the start.
The market absorbs a lot of bad news without reacting and suddenly an event acts like the last straw on the camel's back leading it to break down. The current geopolitical situation, and high inflation are sure reasons for the market’s nervousness but so are many others like the upcoming state elections and then general elections. So it is difficult to zero down on any particular reason for the fall.
Q: But the volatility has not seen any major spike yet, rather moving in broad range of 9-13 levels for several weeks now. What does it mean with respect to current equity market conditions?
As I mentioned above, markets keep absorbing a lot of news before reacting in either direction. Rangebound volatility implies that the market is expecting a one-sided move on either side and as such is not surprised with the current move.
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Q: What could be the possible impact on equity markets and US economy, if by any chance, there is a sharp decline in US bond yields in coming months?
A sudden drop in bond yields can have several potential effects on the stock market and the US economy:
a) Stock Market Reaction: Positive Impact: Lower bond yields can make stocks more attractive as an investment option. Investors might shift their funds from bonds to stocks in search of better returns, potentially leading to an increase in stock prices.
b) Economic Implications:
>> Lower Borrowing Costs: Reduced bond yields can result in lower interest rates, making it cheaper for businesses and individuals to borrow money. This can stimulate economic activity, including business investments and consumer spending.
>> Housing Market: Lower mortgage rates can boost the housing market, making it more affordable for people to buy homes and potentially increasing home sales.
>> Currency Effects: A significant drop in bond yields might lead to a weaker US dollar, which can have both positive and negative effects on the economy. A weaker dollar can make US exports more competitive but may also contribute to higher import costs.
c) Income for Bondholders: Bondholders, especially those with existing bonds with higher yields, may experience capital gains as the value of their bonds rises with falling yields. However, new bond investors may find it more challenging to secure high yields.
d) Inflation Concerns: A sudden drop in bond yields might signal concerns about deflation or economic instability. This could raise concerns about the health of the economy.
It’s essential to note that market reactions to changes in bond yields can be complex and depend on various factors, including the magnitude and speed of the yield drop, overall economic conditions, and investor sentiment. Furthermore, the relationship between bond yields, stock prices, and the economy is not always straightforward, and there can be many interrelated dynamics at play.
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Q: Your take on the current corporate earnings season....
The corporate earnings season so far has been broadly good. There are more companies delivering results which were better than the estimates than the other way round. More than half of the Nifty50 companies have declared their results so far and their combined profit growth is around 38 percent versus an expectations of 34 percent growth.
Companies are also talking about gross margin tailwinds and expect the second half to be better across most of the sectors. We also expect the same trend to continue for the other companies and don’t expect any cuts in earnings estimates for Nifty50 companies for FY24E.
Q: Do you think the market participants will keenly focus on States elections?
We are getting to the start of the election season with a series of state elections happening in November and December. These would be keenly watched as they are happening just short of the General Elections in May 2024. The ruling party at the centre not winning in the state elections may make the market jittery in the near term as people would link it with the general elections. This may have a bearing on the market movement in the interim.
Having said that, we have seen time and again that the verdict in state elections and Central elections can be very different. As per a recent study by JP Morgan, the price movement of the Indian equity market prior to the general elections (since 1991) and post that, shows that the market gave positive return 6-month, 3-month and 1-month prior to the general elections 75 percent of the time.
So one may not see too much impact of the state election results on the equity markets and people may quickly focus back on the upcoming general election results for cues.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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