Divam Sharma, co-founder of Green Portfolio, feels if the US 10-year bond yields increase beyond 2%, emerging markets like India will have to consider increasing their interest rates, which can have an impact on the current bull run in equity markets.
Sharma is a Member of The Institute of Chartered Accountants of India and has over 13 years of experience in investment management in stock markets. He has worked for over 6 years as Financial Analyst with banks, including Kotak Mahindra Bank, Citibank, and IMGC.
In an interview to Moneycontrol's Kshitij Anand, Sharma expects that the loose global liquidity situation is likely to continue for at least next 2-3 financial years and will trigger further highs for markets in the coming years, he added.
Edited excerpts -
Q) Do you think global liquidity will continue in FY22?
A) The commentary from the US Fed instills a lot of confidence in Indian markets. The FOMC does not expect the interest rates to increase before at least 2024.
The commentary also added that it is too early to scale back the Feds purchase of $120bn treasury bonds and mortgage-backed securities.
The commentary on inflation, unemployment, and growth also showed a positive outlook. This very dovish commentary made the US markets cheer while the bond yields for short-term debt fell.
We expect that the global liquidity will continue for at least the next 2-3 financial years and will trigger further highs for markets in the coming years.
Q) The recent rise in the US Bond Yields above 1.7% has resulted in a knee-jerk reaction on D-St. Which is the level that will reverse the trend for equity markets as money will rotate from equity to bonds?
A) The rise in US 10-year bond yields beyond 2% can result in emerging market economies including India to consider increasing the interest rates which can have an impact on the current bull run in equity markets.
Equity markets have had a great run in the last 1 year considering high liquidity and optimism around corporate numbers. The US 10-year bond yields have risen back, nearing the 2nd Jan highs of 1.88%.
However, despite the rise in bond yields, there is high optimism in equity markets considering the extremely dovish Fed, and anticipated positive macro-outlook.
Q) The FY21 resulted in a good 70% rally in Sensex and Nifty. Do you think investors should now pare their expectations for FY22?
A) Certainly not. The rally we have seen in FY21 is not without fundamentals. The rally demonstrates the changing paradigm of global trade.
The global demand has seen a swift move away from China and toward India, also popularly known as China + 1. We believe that this trend will continue.
Besides the global shift in demand, Indian demand has also remained robust, thanks to the Indian Rural economy which flourished despite the lockdown.
Border tussle with China has also awakened the Indian Government which started taking swift and decisive actions to reduce dependence on other countries specifically China. They termed it, Atmanirbhar Bharat. These actions included PLI schemes, tariff, and non-tariff barriers, etc.
To sum it up, while some shares might have rallied beyond their true worth, we think the market has still room to grow, and selective sector/ stocks could outperform in the next 2-5 years. We do not advise a sell at this point in time.
While short-term prediction is impossible, in the long run, the Indian Economy is poised to grow at a rate, never seen before.
Q) Which sectors are likely to hog the limelight in FY22?
A) Given the Government’s resolve, we believe that privatization could be the story to buy for FY 2022. With Air India, BPCL, Shipping Corporation in advance stages of being sold, and several others in the queue, this time, it seems GOI will be able to actually do it.
Also, noticeable is the privatization/monetization of various assets for e.g. discom operations of UT and other major states (our pick is CESC Ltd.) and Airports.
Other than this, we like Chemical (including API and Pharma) and we also think that despite the run up these shares have seen, there is immense upside still left.
With Anti-China actions and China+1 looking a reality, the Chemical sector is bound to flourish in the near future. We like Valiant Organics Ltd and Caplin Point Laboratories Ltd in this space.
Q) Small & Midcaps came to the limelight in FY21 and do you think the momentum will continue in FY22 as compared to large-caps and why?
A) The rally we have seen in FY 2020-21, could be compared with the rally that started prior to the 2014 general elections. That rally lasted for like 4 years and mid and small caps were real winners.
This time too we think that mid and small-cap will outperform the markets. However, in the euphoria, don’t forget the fundamentals of the company. Because ‘It's only when the tide goes out that you learn who has been swimming naked.
In our opinion, the Large Cap space will grow at a rate more or less representing the economic growth as we see them facing a mild saturation kind of a situation.
However, selected mid and small-cap counters have room to grow disproportionately. We keep looking for companies with lesser debt and growth plans.
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