The air of inflation across the world gets thicker with fears of a major lockdown in COVID-ridden China, which still remains the largest manufacturing hub, disrupting the global supply chain.
"As long as any large economy continues to adopt zero-COVID strategy and imposes lockdown to rein in the contagion, it can be a risk for the equity markets," shares Hemant Kanawala, Senior EVP and Head of Equity at Kotak Life Insurance, at an interaction with Moneycontrol.
Major risk to equity as an asset class is from high commodity prices as it can impact the economic growth and consequently the earnings growth of the companies, he says. Excerpts from the interview:
We are in the middle of a rising inflation risk, a worsening geopolitical tension, escalating oil prices, and surging interest rate environment. Do you think equity as an asset class would underperform this year?
For the last two years, most of the central banks adopted accommodative monetary policy to support the economy. This stimulated the demand but due to supply disruption, inflation has moved higher in many parts of the world. Also due to high liquidity, the valuation of equity had moved significantly above the long-term averages.
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As the central banks raise interest rates to control inflation, valuation should normalise towards long-term averages. Hence, large part of the return will come from the earnings growth. Major risk to equity as an asset class is from high commodity prices as it can impact economic growth and consequently the earnings growth of the companies.
Do you see COVID still as a risk for the equity market?
As China is still the largest manufacturing hub of the world, any large lockdowns can create supply disruption, which will accentuate inflationary environment. This can force the central banks to increase interest rates aggressively, which will have a negative impact for equity markets.
As long as any large economy continues to adopt zero-COVUD strategy and imposes lockdown to control, it can be a risk for the equity market.
What are the key themes that you are backing right now?
The first theme we are backing now is opening up of the economy. As the fear of COVID comes down in India and the economy starts to function normally, many segments of the economy like banking, travel and retail will benefit.
The other theme is clean energy. As the world is looking at high oil and coal prices, it will further incentivise investment in renewable power, electric vehicles and green hydrogen.
Do you think the new-age tech companies listed in 2021 are available at attractive valuations now?
Many of the new-age tech companies have negative cashflows for the next two-three years. In a rising interest rate environment, they will be impacted more as the availability of funds to them reduces. Although many of them have corrected significantly from their recent highs and they have large addressable market opportunities, investors will need to have a long-term investment horizon to make good returns from them.
Given the higher inflation and an impending higher interest rate regime, do see any large earnings downgrade ahead?
Higher commodity prices and interest rates will impact economic growth and margins of the company. This can lead to earnings downgrade as effect of both the events become visible to the investors.
Do see a risk of stagflation for India considering the rising inflation?
India is better placed compared to many other large economies on the inflation front as it is largely self-sufficient in food production. Also, there is a large export opportunity available as the world looks to diversify its supply base away from China. This can support growth even when the global growth is slowing down. Key risk to India emerges from high oil and coal prices.
Defence space has seen a significant run-up recently. How do you approach the space?
Defence offers a very attractive investment opportunity as the government is committed to localise production. In many items, local sourcing is made mandatory going forward. Also, due to current geo political development, defence spend is likely to increase globally and more allocation will be made towards equipment than manpower. This can offer good growth opportunity for long period of time.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.