From a near-term perspective, we do believe most of the upside is priced in. Especially because estimates were also conservative for 1Q and 2Q due to the lack of predictability associated with Covid.
We would recommend investors to take some profit here on the back of the strong rally and see-off the rest of the year (enjoy the festive season) and await company management commentary post 3QFY21 results to get a clearer picture and more conviction in FY22 growth estimates, Amit Shah, Head of India Equity Research, BNP Paribas said in an interview with Moneycontrol’s Kshitij Anand.
Q) How will the US election results impact Indian markets?
A) The Indian markets are benefitting and should continue to see the benefit on the back of a democrat win in US election. However, on account of the Senate stalemate, the benefit with regard to a US fiscal stimulus may be muted and hence the potential benefit which could have been long-lasting in nature is subdued a bit as the fiscal stimulus would be lower than what was expected in the event the democrats controlled the US senate.
Q) Most investors would want to write off 2020 from their portfolio. Even after rallying more than 50% from March lows, most portfolios are negative or at best single digit returns. What are you advising your clients?
A) BNP’s global risk indicators that have served us well in identifying over and under-valued market conditions are turning cautious and are highlighting that risk assets are nearing overbought levels and there is a sense of complacency in the market.
Having said that emerging markets, including India, do remain beneficiaries of liquidity. So while we do feel that the market has run ahead of itself, we do not expect a mid-teens kind of correction from current levels.
From current levels – the Nifty may not rally materially, but there will be sector rotation. Some of it we are already seeing pan out, we continue to like financials and especially private sector banks as, despite the recent rally in banks, they still remain below their all-time highs, under-performing the broader market.
We also like telecom space both the pure-play and conglomerate players and lastly, the 4W space in autos also looks attractive.
Q) Green shoots are clearly visible be it in auto numbers, GST numbers, stable earnings and the macro data. Do you feel that much of it is already priced in which would cap the upside?
A) Yeah from a near-term perspective we do believe most of the upside is priced in. Especially because estimates were also conservative for 1Q and 2Q due to the lack of predictability associated with Covid.
However, from 3Q onwards as most companies come back to pre-COVID levels in terms of demand and operating levels, the risk of disappointment can be on the higher side as earnings growth expectations may also be high.
Q) What is your call on September quarter earnings? Some brokerages have already upgraded their EPS estimates for Nifty. What is your view – do you think numbers warrant an earnings upgrade and why?
A) By now most of the high-quality large-cap companies have reported numbers and more than 60% of the companies have beat earnings estimates largely on the back of cost savings and also on account of some improvement in on-the-ground activity, towards the 2H of 2QFY21.
Yeah, there is a case for upside to FY21, but that also makes the bar that much higher for FY22. This is one of our fears for the market as at current levels the nifty is trading at 19X FY22 earnings compared to five year average of 17x.
While the Nifty multiples in an abundant liquidity scenario may not look high, the FY22 earnings estimates for Nifty are factoring a 40 percent increase which seems a bit stretched to us. Especially if FY21 turns out to better than expectations.
Q) As we approach the festive season – what would be your message to investors on Diwali 2020?
A) We would recommend investors to take some profits here on back of the strong rally and see-off the rest of the year (enjoy the festive season) and await company management commentary post 3QFY21 results to get a clearer picture and more conviction in FY22 growth estimates.
The NIFTY at current levels is trading at 19x FY22 earnings while the five year average is 17x. In a liquidity driven environment this may not be a big premium, but when you see the earnings estimation for FY22 over FY21 is where we get worried.
FY22 Street estimates mark for a 40% earnings growth over FY21 which seems a stretch to us, making current nifty levels a bit expensive.
Q) What should investors’ expect from SAMVAT 2077? After the super rally we have seen, we are just 400 points shy on Nifty to hit fresh record highs. Amy target that you have in mind for the next 12 months?
A) Our FY21 SENSEX target of 41500 is breached on the back of positive US election outcome, continued liquidity wave making its way into emerging markets, and gradual unlocking of the Indian economy.
As a result, we do expect a correction in the near term, but as highlighted earlier it may not be a material one but there would be sector rotation. We believe again we can see money moving to IT and consumer discretionary & Pharma while taking some profits from the financials space.
Q) What is your view on small & midcaps for the next 12 months? Do you think the outperformance will continue?
A) As risk appetite increases which usually combined with abundant liquidity, the first wave of outperformance goes to the large caps, and as and how the outlook for risk gets more sustainable as is the case today we see small and mid-caps stocks begin to rally.
Mid-caps haven’t really done much in this rally so we are actually quite bullish on some quality mid-caps within the financials, consumer and IT space.
Small caps have done well, but we still believe there is some more room, especially on account of the front line stocks looking expensive. But as highlighted earlier, within the mid and small caps stocks we would stick with the quality names despite slightly higher valuations.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.