DAILY VOICE | Smart money to move to large private banks, autos, construction, consumption: Dhananjay Sinha of JM Financial

Dhananjay Sinha, Managing Director & Chief – Strategist, JM Financial Institutional Securities Limited, is of the view that if the second wave is contained either through effective vaccination or natural immunisation, then the strength in the market should continue.

Sinha has over 20 years of experience in Indian financial markets. Prior to joining JM Financial, Sinha worked with Systematix Group, IDFC Securities, Emkay Global Financial Services, Centrum Broking, Infosys, ICICI Bank, JM Morgan Stanley, Times Bank etc.

In an interview with Moneycontrol's Kshitij Anand, Sinha said that the downside will be limited from here on, and he still maintains a target of 15700 on the Nifty by end of the year.

Edited excerpts:-

Q) The second wave is not yet over for India, and the third wave is expected to hit in October. Do you think the market has factored in third-wave impact? What is the kind of impact you see on markets, as well as earnings?

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Dhananjay Sinha

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A) The market is still grappling with the impact of the second wave, and at the moment it is not factoring in a scenario of a third wave. As of now, we do not exactly know the impact of the ongoing wave in terms of earnings and revenue numbers, etc.

But, we definitely know that growth expectations are being scaled down with real GDP growth in light of the second wave. Optimism around a strong rebound in FY22 has blunted with consensus projection at 10.5-11% edging towards 9.5-10%. We are closer to 9%.

The general expectation is that the second wave should subside by end of May and June is likely to be better. Hence, the impact of the second wave is seen as temporary.

The market has been resilient with benchmark indices down by 3-4% from the peak in February 2021 after rising by more than 100% from the First wave bottom in March 2020.

If the second wave is indeed short and we get to a reasonable level of immunisation through vaccination or natural immunisation through recovery from infected cases by end of July, then the strength in the market should continue.

However, if the second wave stretches and is followed by a thid wave, the Indian market can continue to underperform.

The possibility of a large crack is limited in my view.

Q) Small & midcaps have remained resilient in the past few months but with most businesses remain shut on account of lockdown that could continue for some more time – do you think the outperformance will continue?

A) While the benchmark indices have remained resilient, we saw some FII sell-off of about USD 1.5-2 billion, which is very modest compared to the massive reversal in March 2020.

Sector indices that saw max impact were cyclical- banks, autos, capital goods, realty, etc., especially where FIIs had larger exposure.

Hence, the midcaps held by domestic investors have continued to perform better. In my view, if the the second wave is indeed short and things become better after May or June, it is likely that the largecaps, and good quality cyclicals can outperform

Q) The Warren Buffett indicator is above Long Term Averages at 92%, according to a report. It has come down from a high of 105 in FY21. Do you see this as a sign of caution?

A) Mcap to GDP has been a poor indicator of market performance. The better thing to look at is the money supply to GDP.

In the context of rising money supply and declining velocity of money, financial asset prices tend to bloat. Hence, the key thing is dollar supply, policy rates, and inflation outlook.

Q) Where do you see smart money moving in various sectors and why?

A) Large private banks, autos, construction, consumption

Q) From an FII perspective, how is India placed in terms of valuations when compared to global peers. Are we still attractive?

A) India’s valuations have seen a steep rebound to levels higher than the past 10-year average. But, that is generally the case across the world.

India FII flows is mainly a function of global liquidity and rates outlook scenario and to some extent growth differential. At the moment, fears of high US inflation are feeding into the early winding of QEs by the Fed and earlier than expected lift-off.

Secondly, India is also facing growth concerns arising from Wave 2. All these are impacting FII flows in the near term. In our view if these concerns are temporary then there should be a revival in FII flows in the coming months.

Q) Which are the key risk to the current bull market? Nifty is down by about 5% from the highs – do you see more downside before things stabalise and why?

A) I think the downside will be limited. I still maintain the Nifty target of 15700 by end of the year.

Q) According to CMIE report, 11 lakh jobs have gone amid rise in COVID. This will hit the economy and earnings of India Inc. Do you think this will put the banking and financial sector including NBFCs at a risk in the near term?

A) We think the financial sector is fairly stable. Large banks are endowed with good capital buffer, they have provided for NPAs substantially, and have large liquidity in their book. So they should be able to withstand near-term stress very well.

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