Hemang Kapasi, Head of Equities at Sanctum Wealth feels banking and financials are well-placed right now with the improving credit costs and rising interest rate environment, which is better for NIM (net interest margin) expansion.
We believe banking and financials should do well once the current geopolitical tensions diffuse, said Kapasi in an interview to Moneycontrol.
Hemang Kapasi has more than 13 years of experience in the equity market.
Talking about the earnings, he said India Inc is bracing for earning downgrade in Q4FY22, largely led by elevated input and power costs.
What is the one key theme that you want to bet on for the next fiscal?
As things stand, we believe that the next financial year would not be led by one particular sector/theme as things are likely to be volatile. Having said that, we believe banking and financials should do well once the current geopolitical tensions diffuse. Overall, financials are placed well with improving credit cost and rising interest rate environment better for NIM (net interest margin) expansion. Credit is also recovering from the lows of the pandemic and banks are flushed with growth capital which might pick up steam over the next few quarters.
Other themes we have been positive on since last 3-5 years are the manufacturing & industrial sector on the back of improvement and pickup in the capex cycle and the real estate which after many years is on a recovery path driven by government focus on making India Atmanirbhar and China plus one strategy by corporates.
Do you think the worst is already discounted in stock prices of auto space?
The recent correction in the stock prices of the auto companies suggests that a lot of the pain has already been factored in but we believe that the auto sector is still not out of the woods. The sector is still grappling with issues of semiconductor shortages and rising input costs.
Much of the slowdown in sales was due to supply constraints, especially since automobile manufacturers have been grappling with a global shortage of semiconductors which are critical components. Recent geopolitical tensions have further increased the key input cost (metals) which shall further put pressure on margins in short term. We believe this will take at least a couple of more quarters for things to ease and settle down. Recovery can be seen in the second half of FY23.
What are your earnings expectations from India Inc for Q4FY22 and the second half of FY23?
After seven quarters of earnings upgrade, India Inc is bracing for earning downgrade in Q4FY22 largely led by elevated input and power costs. The current inflation has moving parts – geopolitical premium in commodity prices, supply chain issues related to war and unresolved bottlenecks post pandemic. Prices will adjust quickly once the tensions ease, but supply chains normally takes time to settle. Hence, a lot of it depends on the early diffusion of geopolitical situation else inflation will start hurting the demand side as well in the next financial year.
Do you think the market can hit fresh high this calendar year? Will the resolution to Ukraine-Russia crisis be a reason for fresh high?
Every market (equity, commodities, debt) is a probabilistic institution in itself. There are two elements that world over investors are monitoring. Interest rates and geopolitical tensions lead to further escalation. Empirical evidence shows that out of 12 rate hike cycles over the past 7-8 decades, only once equity markets have given negative returns. This indicates that if supported by growth the rate hike event is largely discounted.
Geopolitical tensions currently have created further supply shocks taking most of the commodity spot prices to an all-time high level and which will have some short term impact on inflation as well as earnings. But, if one looks at future prices of all these commodities they are in backwardation (discount to current spot price). So, if these tensions get resolved quickly, we might likely test all-time high in CY22 as markets start to discount normalization in the next 3-6 months period.
Given the inflow of domestic money, do you see the dependency on FIIs' money reducing more going ahead?
India's equity market has breached into the world's top five club in terms of market-capitalization for the first time in March 2022. Leaving behind UK & Saudi Arabia, its market-capitalization stands at $3.31 trillion.
A matured and healthy capital market is one that doesn't get influenced by the actions of one particular type of investor category. The influence of FIIs in the Indian capital markets can be seen in their holding during the period between 2004 and 2015. During this period their holding in NSE 500 stocks increased from 13 percent to 21 percent. It's also noteworthy here that in 2008 when FIIs sold equities worth around Rs 53,000 crore, Indian equity markets collapsed by 35 percent.
It's been the 6th straight month since October 2021, FIIs have been a net sellers in the Indian equity markets to the tune of around Rs 1.5 lakh crore which has been offset by domestic inflows in equity markets to the tune of around Rs 1.6 lakh crore. Despite this heavy selling, the Indian equity markets are down merely less than 8 percent from its peak of 18,600. FIIs holding in NSE500 has been stagnant at +20 percent levels and its currently at its lowest in the last 2 years while retail and domestic institution holdings has been steadily rising.
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Apart from favourable demographics and under penetration in equity markets, there are a few structural changes that have happened during the last few years in India. Government policy push towards financialization of savings and better acceptance of equities as saving products from a longer term perspective has helped increase domestic flows. This can be attributable to two data points – first, the highest ever amount of SIP (systematic investment plan) book in mutual funds with a monthly inflow of Rs 11,500 crore and total AUM (assets under management) linked to SIP hit a record Rs 5.8 lakh crore in January 2022. Second, the rise of passive investing in India through mutual funds has picked up growth in recent years. While the large part of the passive fund inflows today is by Employee Provident Fund (EPFO) investing in ETFs of Nifty50, Sensex, CPSEs, Bharat22 indices etc. Passive Mutual fund AUM now accounts for less than Rs 5 lakh crore.
Currently, Indian households allocate hardly 4-5 percent of their wealth in equities, the proportion of domestic flow to equities is bound to increase as we grow and reap the benefits of demographic dividends.
India being a growth market, FIIs are likely to stay invested in India over a long period of time as well as they still hold ~20 percent in NSE500 companies. To conclude, the texture of the Indian share market is changing where the exodus of FIIs will be more counter balanced by domestic participants with steady state inflows into equities.
What are the challenges for the market in the coming financial year?
The key tail risk for markets globally is geopolitical tensions. If it continues to flare up, it shall keep supply side shocks unresolved for months making inflation unmanageable which could eventually hurt the prospective demand.
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