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Daily Voice | These financial entities qualify for a place in portfolio, says Devang Mehta of Centrum Wealth

Holding on to good companies in this market turmoil is the least one can do in one's wealth creation journey. In life & investing, we are trained to see action as a sign of progress.

July 05, 2022 / 07:23 AM IST
Devang Mehta of Centrum Wealth

Devang Mehta of Centrum Wealth

"The current fall seems like a speed breaker within a structural bull market in India," Devang Mehta, Head- Equity Advisory at Centrum Wealth said in an interview to Moneycontrol. Remember the market corrected more than 9 percent in 2022 so far and 15 percent from its record high levels.

Current market turmoil is more a fund flow issue due to external shocks owing to financial tightening in advanced economies and war led disruptions. Domestically while the financial markets have been impacted by global disruptions causing lifetime high outflows by FIIs, the domestic economy is more resilient compared to earlier periods of shocks, he explained.

He believes sectoral leadership can change from commodities to consumption and capex driven themes. Financial entities like retail & corporate banks, consumer NBFCs, insurance companies & few intermediaries qualify for a place in portfolio, the expert said.

Do you expect the IT sector to see another round of major correction if the US sees recession?

IT sector has gone through a severe correction in the past couple of quarters owing to correction in the major mother market index Nasdaq. US IT & Tech related frontline stocks have seen drawdowns of more than 50 percent. Indian IT businesses have been showing great resilience in terms of fundamental growth matrices, but have been punished severely on account of major over ownership of FIIs.

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A small margin miss & attrition concerns have led to a round of valuation correction as well. Most of these companies have diversified their business streams. It needs to be remembered that Cloud computing & digital transformation programs started during Covid-19 will continue to grow over the next several quarters as companies look to get maximum utilization out of the capabilities built over the last few years.

There are mixed forecasts ranging from US recession to slowdown to temporary blips. However, the key United States market facing a prolonged recession can add to the woes of IT companies. The management guidance in the forthcoming first quarter result season will decide the medium term direction of IT businesses.

Few experts were saying that major FII inflow in India is likely only after general elections 2024. What are your thoughts and do you agree?

The FPI outflows this time, have been noticeably higher than those during 2008-09 (more than two and half times) and 2018-19 (about one-fifth of current outflow). June saw an outflow of $6.4 billion. Current year till date, outflows are now pegged at $28 billion (highest ever, even after adjusting for market-cap as per some estimates) – which has pushed FII ownership in Indian equities to a low of around 18 percent (close to a 5-year low). Such a huge selling has sort of got absorbed & cushioned by the strength of domestic flows, be it mutual funds, insurance companies, HNI's, Family offices or retail investors.

For markets to stabilize in the near term, the FII selling need to stop at some point, sooner than later. However, meaningful inflows in emerging market equities would depend upon the velocity of rise in inflation & interest rates.

One needs to be rest assured, that India will emerge stronger from the crisis, once the dust settles. Right from the demographic advantages related to consumption to financialisation of savings to upcoming capex to revival of earnings cycle to political stability, India has the right recipe.

It's difficult to predict the time from where the FIIs would turn positive, but one has to be better prepared in anticipation of the same. General elections are still couple of years away, whether the FIIs would be able to wait out for this long, seems difficult to digest.

What are the opportunities for India if the US gets into recession?

US economy has been displaying underlying strength highlighted by retail sales, PMI numbers and industrial output which continue to remain robust. Unemployment rate in US is at multi-decade low & household Balance Sheets are holding strong, not reflective of a recession. A sharp demand destruction in western countries due to higher inflation remains the biggest near-term challenge for India.

As Chinese economy slows down, India is likely to gain from global supply chain realignments, high energy price led outsourcing from Europe, and underlying momentum in domestic demand.

Hypothetically, if US gets into a recession, a number of domestic focused companies would come to the fore & investors would benefit more from demographic demand led growth. Also, if recessionary trends emerge, India as a crude & commodity importer would stand to benefit & will also gain from lower imported inflation. Raw material pressures would ebb & margin improvement can follow. However, from a stock market trend perspective, it is difficult to decouple from a large market like US.

We are in the beginning of quarterly earnings season. What are your broad earnings expectations and what are the sectors that can surprise the street?

Cyclical sectors like metals, oil & gas and chemicals have seen sharp rises in EBITDA (earnings before interest, tax, depreciation and amortisation) margins while most of the consumption related sectors, cement and capital goods have seen margin compression, given the sharp rise in commodity prices.

With commodities cooling off, the trend can now reverse as most companies have taken price hikes, giving these sectors a margin boost going ahead. However, the impact of this will not be fully captured in the first quarter numbers. There will be a flurry of positive & negative surprises as a number of variables were at play. More than the actual numbers, the street wants to tune into the management commentary, body language & guidance on demand scenario, supply constraints, views on imported inflation & interest rates. Financials, autos, IT & some cyclicals are likely to report good earnings.

What are the chances of market returning to record high levels by March 2023?

Current market turmoil is more a fund flow issue due to external shocks owing to financial tightening in advanced economies and war led disruptions. Domestically while the financial markets have been impacted by global disruptions causing lifetime high outflows by FIIs, the domestic economy is more resilient compared to earlier periods of shocks.

High frequency indicators like power consumption, credit growth, E-ways bills continue to show robust growth. Banks are seeing early signs of pick up in private capital expenditure growth fuelled by large infrastructure projects, the production-linked incentive (PLI) scheme and higher utilisation of working capital loans, a pointer of sustained revival.

More than guessing the trajectory & putting a number to the index, one has to focus on deploying capital to great businesses which have seen a substantial downfall in stock prices with no change in their fundamentals. The current fall seems like a speed breaker within a structural bull market in India.

Do you think the valuations are reasonable after recent correction, and if yes then what are themes that you are looking at now?

Nifty consensus earnings for FY23 and FY24 are Rs 890 / Rs 1,000 suggesting valuation of 17.9x and 15.5x respectively which is close to the lower end of the historical PE (price-to-earnings) bands. On a Price to book value & Market cap to GDP basis, we are also near the lower end of historical averages. There has been a PE de-rating in major indices since the October 2021 highs commensurate with a 100 bps increase in the 10 years bond yields.

To cite more data points, only 17 percent of NSE 500 stocks are trading above their 200 DMA plus almost 35 percent of the NSE 500 stocks have seen a correction of more than 30 percent from the top. With supply getting normalized, commodity prices are reverting back to standard levels which would reflect in the easing inflation trajectory. Also this may lead to a bounce back in consumption related themes, be it FMCG, discretionary consumption, building materials & home improvement, autos etc.

Sectoral leadership can change from commodities to consumption and capex driven themes. Financial entities like retail & corporate banks, consumer NBFCs, insurance companies & few intermediaries qualify for a place in portfolio.

Just a case in point, private Banks currently have highest return on assets in past few years and lowest gross non-performing assets in last 26 quarters while valuations are near multi-year low levels. Agro chemicals, specialty chemicals & select IT, Tech & pharma/healthcare related businesses have also gone through a decent round of correction, which makes them candidates for accumulation.

Holding on to good companies in this market turmoil is the least one can do in one's wealth creation journey. In life & investing, we are trained to see action as a sign of progress. That's why doing nothing is very difficult for most of us. Patience during turbulent times requires a lot of effort. That's why, resisting the natural urge to act is more difficult than carrying out the act....

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.
Sunil Shankar Matkar
first published: Jul 5, 2022 07:23 am
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