Devarsh Vakil, Deputy Head of Retail Research at HDFC Securities, is of the opinion that higher inflation is leading to higher bond yields, which may affect valuations and sentiments, but it is unlikely to puncture the rally in equity markets in the long run.
Last week, the bond yields in the US increased to 1.6 percent, the highest level in the last one year.
In an interview with Moneycontrol's Sunil Shankar Matkar, Vakil said the rising bond yields and geopolitical tensions may trigger a bout of profit booking but a sharp fall is unlikely.
Q) What does a rise US bond yields mean for equity investors and traders?
A) Bond yields are rising in anticipation of the expectation of higher inflation. Higher commodity prices are the reason behind heightened inflation expectations. Re-opening of the economy and higher vaccination against COVID-19 is leading to more demand for commodities.
Rising bond yields on the back of better economic prospects will not hurt the prospects of Indian equities. Higher risk-free rates demand a lower valuation of equities to a certain extent and that may be the impact of rising bond yields on the stock market.
Q) What would be the major risks for the Indian equities in the coming months and how can these risks dampen the sentiment?
A) Higher inflation leading to higher bond yields may affect valuations and sentiments but that is unlikely to puncture the rally.
Recent quarterly results have beaten analysts estimates, though prices have risen commensurately. We feel benchmark indices are trading near the upper end of the range – and we expect it to consolidate near term.
Q) Do you expect at least 10-15 percent odd correction in coming weeks given the rising bond yields in the US and geopolitical tensions as well as an overvalued market? Is the market overvalued?
A) Indian benchmark indices are trading near the upper end of our expected range and can witness a correction. Rising bond yields and geopolitical tensions may trigger a bout of profit-booking.
We are of the view that the index is going to consolidate near current levels and digest the gains. There is not much room for indices to rise from recent highs of 15,400 – as at that level, it discounts 22 times expected FY22 aggregate earnings for Nifty companies. At the same time, we are not expecting a sharp fall as well. Corrections are healthy in bull markets and result in stocks moving from the hands of weak bulls to stronger ones – leading to more upside.
Q) What is your take on the December quarter earnings? Do you expect Q4 to be stronger than Q3 and will the re-rating continue in the coming quarters?
A) Corporate performance in Q3 FY21 has been robust as reflected by a marginal uptick in net sales and strong growth in net profits, indicative of a bright spot in the recovery prospects for the Indian economy. Improved consumer sentiments, festive season demand, further relaxations in the restrictions coupled with cost rationalisation in some expenditure have been the key factors leading to a strong rebound in corporate earnings in Q3 FY21 compared with the previous two quarters.
Nifty FY21, FY22 and FY23 earnings have been upgraded by 14 percent, 8 percent and 6 percent respectively. It was the second consecutive reporting season in which consensus lifted Nifty EPS after 23 quarters of downgrades.
Q) What are those key sectors that can get re-rated in terms of earnings as well as stock performance in Q4 and FY22?
A) Fertilizer and chemicals, capital goods and power – these are the areas where we see significant improvements in earnings prospects.
Q) The government has allowed all private banks to participate in government business. Do you think all concerns related to banking stocks are over now, and will the government announce more measures to boost the banking sector?
A) Private sector Banks have adequately provided for their expected non-performing assets. Recent measures are not going to move the needle for many large private sector banks as the opportunity size of the government business is not big enough for these banks.
The government has announced plans to sell majority stake 2 public sector banks. If they manage to successfully implement this – it will lead to rerating of the government banks.
Q) Do you think the slew of measures announced by the government so far are enough to take India towards the $5 trillion economy goal?
A) Government has taken a decisive turn towards market-driven capitalism in the recent Budget. This is a good beginning, if the government continues on this path of reform and enact more market-friendly policies, there is no doubt in our mind that the Indian economy can achieve higher GDP growth. The pace of growth may vary from time to time but the trajectory is set towards $5 trillion and beyond.
Q) Will the flow in equity and equity-oriented mutual fund schemes turn positive from March onwards?
A) We usually see larger flows towards tax savings plans – ELSS schemes in March month. We expect SIP flows in mutual funds to continue and gradually improve.
Indian retail investors have been behaving very smartly in the last few years. Whenever there is a large fall in equity markets, the retail investors have lapped up equity funds and we expect the same to continue this year as well.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.