Mitesh Dalal, Director and Chief Investment Strategist at Standard Chartered Securities (India)
May 2022 has been a highly volatile month for equities, with Nifty50 nearing to lows seen in July 2021. Unscheduled surprised rate hike by Reserve Bank of India and sharp rate hikes by the US Federal Reserve has led to muted sentiments across the global equities. High inflation continues to be the key concern around the globe for central banks, mainly fuelled by geo-political issues causing disruption in supply chain around the globe.
Markets eventually are likely to adjust themselves with increasing interest rate scenarios, while focus on earnings can provide healthy portfolio returns going ahead to investors. We expect the volatility, which is at its peak currently, to subside in the coming months as the ongoing earnings season brings better clarity on the demand, arrival of monsoon on southern cost of India and a possible resolution to the geo-political issues. The key concern around inflation across the world is likely to normalise post resolution of the geo-political issues.
The current equity valuations (12-month Forward Nifty50 PE ratio is currently nearing its long-term average) provides further comfort as consensus has started factoring c.75-100bps of rate hike by RBI in next 9-12 months along with c.150bps of rate hike getting priced by US FED. Q4 FY22 earnings season has not seen any significant downgrades in earnings estimates. Companies with sustainable growth at reasonable valuations are likely to defend the valuation de-rating across the markets in the current rising interest rate scenario. Management commentaries across the sectors seems to be bullish around demand scenario while margin pressures persist.
The much-required correction/volatility in markets has provided investors an opportunity to add exposure to equities for the long term in a systematic manner. While it's difficult to guess the bottom, adding exposure in current dips is likely to provide healthy returns over the longer term. Technically, Nifty has support c. 15,500 (c.500points downside) while we do expect Nifty returns to be even year-on-year (c.17600 CY22).
Our positive bias remains towards large private sector banks (valuations are favourable versus growth opportunities). Defensives like IT, Pharma, FMCG and Telecom are likely to attract institutional flows in the near term post the recent correction.
Export opportunities in agrochemical companies, industrial components are likely to find sustained earnings growth over the long-to-medium term. Based on technical chart readings, FMCG / consumer stocks are likely to find short term bounce from their distress levels.
Key risks: Crude oil sustaining above the $100 a barrel mark could present a challenge for tackling inflation and act as a risk for fiscal math. Interest rate hikes to compress valuation multiples as cost of equity and cost of debt increase.