MC Interview | Market returns likely in high-teens this year, says Rajesh Cheruvu of Validus Wealth

Macro-economic and earnings growth are expected to be healthy in the upcoming year, driven by solid demand momentum seen in the post pandemic scenario, owing to pent-up demand, combined with healthy rural finances. We believe these conditions augur well for markets and expect them to deliver returns in high teens in 2022.

What are the risk (global and domestic) and concerns that can spoil the market momentum in 2022? Do you think FII outflow is a major concern for India in the current environment?

Global and domestic inflationary trends continue to be a cause for concern and could force monetary authorities to act by tightening much earlier than expected by many market participants. The recent steps of Bank of England and US Fed policy stance point to the same.

We expect liquidity conditions to tighten across the markets in 2022, likely contributing to market-wide volatility. Fixed income markets are likely to be under pressure with falling prices due to rising yields, hence, we would continue to prefer equities over fixed income. Domestic retail and institutional participation should provide stability during FPI outflows.

The Union Budget, the much awaited event, will take place on February 1. What are your broad expectations from the Union Budget FY23?

Union Budget FY23 is expected to pursue the strategic intent expressed in the Budget FY22, through stepping up infrastructure spend and providing incentives for corporate capex. On the taxation side, most of the gaps have been filled up and policy stability has been brought in by addressing earlier concerns of domestic and global investors, including retro tax issues.

The inclusion of Indian bonds in global bond indices is also vital to keep the cost of capital under check and provide partial relief to banks from government borrowing programs. Tweaks in taxation for debt investments are essential too and impending to garner interest into that segment and broad-basing the investor categories.

Do you expect further corporate earnings upgrade in coming quarters and why? What are those sectors that will drive upgrade in Nifty EPS in 2022?

Post pandemic, we are witnessing earnings upgrades in most industry segments. It is driven by the strong consumer demand, unusual shift in consumption patterns and liquidity conditions. Such unexpected spurt in demand is causing supply constraints and providing space to businesses for raising rates and fresh capacity build ups. A combination of these factors translates into an improvement in realizations and a better growth outlook.

In terms of sectoral outlook, we believe an uptick in earnings in this phase is likely to be quite broad-based. However, Technology, Real Estate and Capital goods segments are likely to be in focus with the ongoing demand, owing to the compressed demand in the past few years.

The broader markets - Nifty Midcap 100 and Smallcap 100 indices rallied 50 percent and 60 percent respectively, so far in 2021. Do you expect such outperformance (compared to benchmarks) to continue in 2022 as well?

The healthy demand outlook in consumer segments and rapid shift from unorganized to organized augur well for mid and small cap segments. While valuations look rich over the past three years, their multiples are still lower than previous cycle highs. Hence, we see further room for upside in these segments, and they seem likely to outperform large caps.

However, investors are suggested to ensure they have a margin of safety at an entry point to avoid dramatic draw downs in the event of any reversal of trend, similar to 2018.

Have you spotted any themes that investors have to add in their portfolio for strong returns for 2022?

In 2021, Banking has underperformed significantly for a second successive year. Recent trends of improvement in M3 Money supply, deposit, and credit growth likely to support improvement in earnings growth. This, combined with the progress of recoveries in stressed accounts and reversal of provisions, could help them report surprises in the quarters to come.

Further, financial services underperformed with concerns of insurance claims and loss of market share by listed AMCs and securities firms. Life and General insurers could come back with better profitability and growth. Formalization and indigenization themes will continue to be in focus in 2022.

What are the key events to watch out for (domestic as well as global) in the coming year 2022?

On the fiscal policy front, the Union budget will take center stage in the first quarter of the year. Global and domestic macro releases will continue to grab attention in terms of sustaining the ongoing growth recovery, as well surge in inflation.

Monetary policy changes by both global central banks and our RBI are key to watch from a liquidity perspective.

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