Amnish Aggarwal, Head – Research, Institutional Equities at Prabhudas Lilladher remains constructive on the markets. Unlike last year, when everything rallied, we believe H2 2021 will be more of a stock pickers market.
Aggarwal is a market veteran with over two decades of experience under his belt. He has vast experience in covering consumption space including sectors like FMCG, retail, QSR, consumer durables, media and banking.
In an interview with Moneycontrol's Kshitij Anand, Aggarwal said the rally has become much more broad-based on hopes of growth revival despite dark clouds on the horizon. Edited excerpts:
Q) The US Fed signalled a sooner than an expected rate hike. What is the impact you foresee on Indian markets and currency?
A) The US Fed has hinted at a rate hike before 2023 which might be prompted by an increase in global inflation. An increase in the US rates can reduce the money flow to the emerging markets including India.
Given rising crude and commodity prices and a possible hike in the US interest rates, there could be an increase in INR/USD volatility with weakness in the currency.
The current global market rally has been led by global money flow, so the markets might go into healthy correction mode.
Q) We are on the verge of completing the first six months of 2021 – and the journey has been fabulous. We have seen Nifty hitting 15900, Sensex climbing 53000. How do you sum up the rally?
A) India is one of the best-performing markets in the last 6 months, despite the second wave of COVID hitting the country hard.
Strong liquidity flow and India’s response to COVID, the vaccination program, strong Agri output, and prices as well a growth-friendly budget have enabled a strong surge in the Nifty.
The rally has become much more broad-based on hopes of growth revival, despite there being dark clouds on the horizon.
Q) What is your view on H2 2021 for markets? And, which sectors will hog the limelight?
A) We remain constructive on the markets. Unlike last year when everything rallied, we believe 2H21 to be more of a stock pickers market.
We believe Banks, AMC’s, Agrochemicals, Infra, Capital Goods, Retail, Travel, and Tourism to do well in the 2H.
We believe IT Services, Digital/ Internet/EV, Insurance, and City Gas distribution remain structural themes in the long term.
Q) Do you think the US Federal Reserve event will have an impact on FII flows as well?
A) Although, the US Fed event is not directly linked to FII inflows. But, an increase in rates can certainly reduce the hot money tap while long-term India bet and the story will continue to attract capital.
Q) The Indian market is trading at expensive valuations when we compare it to historical levels. How should investors approach the market at these levels?
A) Indian markets are currently trading at a premium to 10-year averages and seem quite balanced as it factors in a sharp revival in growth.
We expect minor cuts in the Nifty EPS for FY22-FY23, although they are not trading at all-time high multiples. Markets have seen significant outperformance by mid/small caps in the past few months.
We remain cautiously optimistic on markets, although we don’t rule out intermittent corrections due to expensive valuations.
We advise focusing on fundamentally strong companies and avoid getting into speculative stocks at this point in time.
Q) So, the cheap money or the borrowed money is likely to slow down – which sectors could see the impact of that?
A) The reduction in money flow could impact all the sectors. However, the last few months of the rally has seen considerable contribution from retail investors and HNI’s also.
We believe commodities, oil and Gas, and Auto can see some impact. There could be some shift towards defensives like the consumer, IT, and Pharma, although consumers, in particular, are trading at expensive valuations and could show weakness to sideways movement in the near term.
Q) There is a lot of chatter about inflation, but at the same time inflation also brings growth which India needs at this point in time. Do you think RBI could actually ignore inflation for some more time and stay put and focus on growth even though the Fed signalled its stance?
A) We believe inflation led by global commodities and crude oil, in particular, is detrimental for India. We believe that inflation in metals, Agri commodities etc. can benefit a large agriculture class which is 60% of the population while metals rally will significantly deleverage companies and improve the NPA condition of banks.
However, a sustained increase in product prices will start hurting demand after a lag. We believe RBI might ignore inflation for time being, till the uncertainty remains on the 3rd wave of COVID.
However, we believe a combination of rising crude prices, general commodity inflation, and growth revival can result in a change in stance towards the close of the current financial year.
Q) What is your view on global commodities?
A) Global commodities have rallied due to a decline in production and revival in demand post 1st wave of COVID. We believe that the shortage of commodities is likely to sustain for the near term.
However, a lot depends upon the huge infra spending plan by the US, which is termed as the largest one post world war II. A kick start of the same can result in commodities sustaining prices above the last 5 year average for a considerable time.
Disclaimer: The views and investment tips expressed by 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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