Markets factoring in robust FY22 economic growth, improved corporate profits to GDP ratio, says Devarsh Vakil of HDFC Securities

Markets are factoring in robust economic growth in FY22 and improving corporate profits to GDP ratio leading to superior earnings growth.

Paytm has filed its DRHP, LIC is making preparations to file its documents and Zomato’s public offer got a strong response. Do you think the primary market will see record fund-raising in 2021?

Compared to 39 corporate raising Rs 37,677 crore in FY19, 69 companies raised Rs 74,707 crore in FY20, in just a few months into this financial year, 17 corporates have raised more than Rs 20,000 crore and the pipeline is very strong. We feel FY22 will see a record amount of money raised as large issues like LIC along with a host of smaller companies is going to hit the markets this year.

Fuel prices have been rising. Do we need to worry about inflation, even though experts say it is transitory and not permanent?

Although money supply has risen dramatically in many parts of the globe, the velocity of money has taken a nosedive and that is the reason why such a huge amount of liquidity has not stoked higher inflation. In few weeks, the current scare of higher inflation, on the back of rising commodity prices, will taper off but structurally, commodity prices will generate higher inflation in the times to come.

A lot of experts expect the Fed to start tapering off bond purchases towards 2021-end or the beginning of 2022. Do you agree and why?

The Fed will not tapper off bond purchases till it reaches its goal of low unemployment in the US. Before Covid-19 hit, the unemployment rate in the US was hovering around 3.5 percent, which hit a high of 15 percent during the lockdowns. Since the reopening of the economy and various stimulus packages are generating higher jobs, the unemployment rate is near 6 percent. We feel the Fed will be patient with lower rates despite the inflation scare and wait for better employment numbers before tapering the bond purchases.

Which are the wealth-creating sectors for the coming year and why? Which are the new sectors that investors can look at?

IT and pharmaceutical stocks have been market leaders and have created enormous wealth for their investors. We are expecting a broad-based earning growth and most sectors are participating in this rally.

Capital goods and engineering-related companies should be on the radar of investors, as we feel a private capital expenditure cycle is turning and these companies have the potential to offer sustainable earnings growth for the next few quarters.

Which are the biggest risks for Indian equity markets?

Indian markets are discounting a robust earnings growth for the next three years. At an aggregate level, Nifty companies earned around Rs 526 a share in FY21. Markets expect earnings to zoom ahead by 40 percent to Rs 747 a share in FY22. Current valuations do not leave much room for expansion of multiples, this means that for markets to sustain at higher levels and grow, earnings expectations must be met.

(If) for any reason, the Nifty is unable to attain these growth expectations, it will have to encounter a correction.

High unemployment, the asset quality of lenders, persistent inflation, a third wave of Covid-19 and geopolitical instability with neighbours such as China and Pakistan are possible threats to earnings recovery. If any of the aforementioned threats were to materialise, we can have a deeper correction in markets.

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