Shibani Kurian, Head – equity research at Kotak Mahindra Asset Management Company advises new-age investors to be disciplined while investing in the markets, do a full research on the assets they are getting into and have patience.
She has close to 17 years of experience in the Indian equity market, of which more than nine years has been with Kotak Asset Management Company.
Kurian expects corporate earnings growth could remain healthy in FY22. "The pent-up demand, shift from unorganised to organised sector and cost optimisation have all lead to better profits for the listed companies. Together with the reforms and government push to accelerate economy, we expect the corporate profits to keep on growing for the next few years," she said.
Edited excerpts:
Q: Considering the record high levels, do you think the market has further room to go up. Can Nifty touch the 20,000-mark by FY22-end?
We believe that the key driver for the market are threefold: a) fundamentals b) sentiment and 3) flows. The earnings trajectory for corporate India has seen a sharp move up in the recent quarters and we expect that corporate earnings growth is likely to remain healthy in FY22. The pent-up demand, shift from unorganised to organised sector and cost optimisation has all lead to better profits for the listed space. Together with the reforms and government push to accelerate economy we expect the corporate profits to keep on growing for the next few years.
Sentiment has also been boosted with the Covid case trajectory and the improvement in the number of vaccines administered. In India, new Covid cases remained largely under control (30,000-40,000 daily). Importantly, the pace of vaccinations has improved over the last month (around 10 million+ doses each on 2 days was seen). On an average vaccinations per day basis, the trend of improvement has continued in September 2021 as well. Around 12 percent of the population is now fully vaccinated and the percentage of population in the large cities who have received at least one dose is high. This is helping cap mortality rate and keeping the pressure off the healthcare infrastructure.
The market is building in some optimism to this effect and the valuations look on the expensive side. However, if one looks at a medium to long term perspective, we find ample opportunities in the market to create long term value for the investors. The key near term risk is that of any third Covid wave.
Q: Is it the time to turn cautious and book profits or remain invested in the market considering 10 percent returns from August?
We believe that time in the market is more important than timing the market. Volatility is part and parcel of equity markets. However, what is needed for long term wealth creation is discipline and patience. Those who took the pain in March 2020 have seen the markets move up sharply post that.
Our view remains that while in the near term headline valuations are at the upper end of the trading band, the drivers of the market in terms of corporate profitability, sentiment and valuations remain well placed from a medium to long term perspective. Talking about fundamentals, we are likely witnessing the beginning of a new multi-year profit cycle. Tax cuts, tighter working capital, reduction in debt and interest burden, cost control etc., have pushed corporate profitability higher. Stock Price is the slave of earning power. The markets are fundamentally supported as long as corporate profitability is on the upswing.
The key near term risk is that of any third Covid wave.
Q: After dovish Fed commentary, foreign investors returned to India last week. Considering the US economic data and Fed action going ahead, do you think the FII flow will continue in the rest of financial year 2021-22?
Flows continue to be strong from both local as well as global investors. Retail and HNI investors have emerged as big buyers in the last 18 months. From an FII perspective, the hawkish expectations from Jackson Hole symposium failed to materialize, supporting risk assets. We believe that globally central banks will remain accommodative and any change in stance will be a calibrated move in order to ensure the least amount of volatility. India has over the last one year received among the highest FII flows among emerging markets. Growth outlook is likely to remain of the key determinants for flows going ahead. Further, emerging markets such as India seemed to be supported by rising regulatory concerns in China and push on “common prosperity”.
Q: New age investors continued to support the market in the absence of FII flow in August. What is your advise to these new age investors or are they very smart in decision making with respect to markets and stocks in current time compared to pre-Covid period?
Our advice to our investors is to be disciplined in terms of investing in the markets, do ones research and have patience. In the equity markets, returns and volatility go hand in hand and hence it is important to stay invested over a long period of time. The SIP route is one of the best ways for investors to participate in long term wealth creation in the equity markets.
Q: Realty stocks gained more than 12 percent in last two weeks. Is it the time to add these stocks in portfolio or better look at other sectors for investment?
We are positive on the real estate sector. We believe that the sector is at the cusp on revival on the back of
a) Lower interest rates
b) Better affordability
c) Trends such as work from home
d) Policy reforms in the sector like RERA
Apart from the real estate sector, we are positive on sectors such as home building, consumer electronics and cement wherein demand to a great extent is an offshoot of real estate revival.
Q: What are those sectors where the investment can be made now with a one year perspective and why?
Some of the key themes and sectors that we are positive on are:
a) Economic revival post the pandemic: The endeavour will be to identify performers in sectors that are expected to benefit from the financialization of the Indian economy, Outsourcing, the huge demographic dividend that India offers
b) Revival of industrial capex: Private Investment has remained on the back foot for the last few years. We anticipate a massive investment cycle lead by both the government and the private sector over the next few years. The steel, Cement and engineering sector is seeing a revival in private sector cap-ex with better capacity utilisation trends
c) Real estate and allied sectors: Work from Home, Low-Interest rates on Housing Loans, Higher affordability and progressive regulation like RERA will likely result in improvement of growth in the real estate sector.
d) Supply chain shifts and PLI scheme: The Production linked incentive scheme is creating growth opportunities. Contract manufacturers in Electricals, Mobile Phones, and Electronics etc. are becoming part of global supply chain management. In the Chemical sector, we see multiyear multimillion-dollar contracts. Auto and Auto Anc sector is of global scale. Agro-processing will provide a great opportunity in the years to come as India has become the 10th largest Agri exporter.
Q: Do you think banking & financials will be the next key driver for the market rally?
The banking sector is the barometer of the economy. While the sector has borne the brunt of the pandemic and its effects, we believe that opportunities are now emerging especially in the case of large banks especially private sector banks. We continue to witness movement of market share in assets and deposits towards larger banks resulting in the consolidation of the market.
Private sector banks have wisely during the pandemic raised capital to shore up their balance sheets and have also increased their provisioning coverage ratios and made additional Covid related provisions. As the economy revives, we expect to see better trends in terms of growth and asset quality. Furthermore, the large corporate sector stress which impacted the profitability of banks in the last 5 years or so seems to be waning with significant corporate deleveraging cycle.
Q: Will the economy be able to grow in double digit in FY22 despite third Covid wave risk?
We expect economic growth to gain momentum from 2HFY22E on cyclical tailwinds including pent-up demand (largely led by contact-intensive services, especially after more people are vaccinated), favorable external demand (goods exports are more than 20 percent above the pre-pandemic level, FYTD) and higher government spending (likely towards capex). The risk of third wave lingers on considering the upcoming festive season when mobility and social gatherings are likely to pick up.
Overall, High frequency data suggest that a swift recovery from the second-wave lows is already underway, which supports a sequential rebound in Q3. In addition, ongoing vaccinations, easy financial conditions and fiscal activism should support domestic demand, with pandemic resurgence or a third wave remaining a key risk. A meaningful ramp-up in vaccinations is key to boosting consumer and business confidence.
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