Daily Voice | Market expects earnings downgrades from Q4, but it's unlikely to be significant, says this CIO

Do you expect more earnings downgrades after March FY23 quarter numbers scheduled next month?

Investors will closely watch the Q4FY23 earnings season as expectations of slower economic growth have risen. There have been challenges seen in two-wheeler sales and other discretionary categories. However, loan growth has been robust in the quarter for the banks, with some pressures on net interest margins.

Thus, the market expects earnings downgrades from sectors like consumer and IT, but earnings to be maintained for sectors like BFSI. Overall, the market is biased towards earnings downgrades from the Q4FY23 results season, but the downgrades are unlikely to be significant as expectations are rather muted.

Will the Reserve Bank of India deliver the last repo rate hike in April before taking a long pause?

The RBI's actions depend on the global environment. The RBI has raised interest rates significantly, which has resulted in higher interest rates for borrowers. The higher interest rates have also started to impact the growth rates of various sectors to some extent.

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However, the US Federal Reserve scatter plot still indicates further rate hikes, which means further rate hikes in India as well. In this situation, it seems that one round of rate hike of 25bps is very likely. After that, the RBI will likely pause events in India, as events in India as well as globally will be closely watched.

Do you see the strong possibility of another 5-7 percent correction in the equity markets?

The possibility of correction continues to linger as the challenges of valuation compression and growth slowdown continue to haunt the market. However, the challenges to some extent are receding as the yield curve suggests the possibility of rate cuts by the end of the year. Thus, the market is evenly poised between bears and bulls, with bears having a slight edge over the bulls.

Do you see high possibility of recession in the US, and can the US recession be a major reason for a 5-7 percent correction?

Most rate hike cycles in the US have ended with a recession in the US. Thus, it is difficult to imagine if this rate hike cycle will be any different. However, the bigger question will be when. There are no clear answers to this.

Also, it is crucial to note that the market generally moves ahead of the events, and at this point, if a US recession is around the corner, the equity markets are likely to have factored in the challenges.

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Are you cautious on the commodities and technology sectors?

We are cautious in both commodities as well as technology sectors. However, we would be a little more cautious in the technology sector as valuations are still not cheap, and slowdown challenges are not visible, which generally come with a lag.

Is the BFSI space looking attractive now after recent corrections? Do you advise to enter into the space now?

BFSI valuations are certainly more attractive. Banks are in a robust balance sheet and credit growth cycle. Thus, after the recent correction banking stocks have become quite attractive in both private banking as well PSU space.

Do you see valuations attractive in the insurance space as well?

Valuations in the insurance space are attractive as the significant correction provides a good entry point. Stocks like ICICI Prudential Life, SBI Life, or even LIC are trading at attractive valuations with limited downside potential.

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