Trend of more upgrades than downgrades likely to continue after Q4 earnings, says Nimish Shah of Waterfield Advisors

The RBI MPC decided to continue with its "accommodative" stance and guided to "remain accommodative" for as long as necessary to sustain growth on a durable basis.

Overall, the RBI policy tone turned out to be more dovish compared to market expectations and reinforced the policy stance to give growth paramount importance, while keeping in mind inflation targeting and effectively managing the huge government borrowings.

The RBI's bigger move was with regards to the Government Securities Acquisition Programme-1 (GSAP-1), which could assist in reducing term premium risk and brings yield curve stability. This is the first time that the RBI has explicitly committed its balance sheet toward the conduct of monetary policy with new tool G-SAP programme.

As compared to open market operations (OMOs), G-SAP is an explicit commitment, which, in turn, will try to partially offset the increase in government borrowing by proper management of the yield curve.

Given the considerable amount of uncertainty over inflation, uneven recovery amidst a second wave of COVID-19 and the risk arising from global macro-economic factors, the RBI's focus is clearly on keeping ample liquidity to maintain financial and economic stability.

Do you foresee better-than-expected earnings in the March quarter as well? Do you expect the trend of more upgrades than downgrades to continue?

The March quarter earnings could be mixed. With the substantial rise in commodity prices in the last three to six months, certain industries like metals, commodities and mining would benefit, while certain industries like automobiles and infrastructure would face margin pressures. However, a large share of the earnings for the broader indices are reflected through sectors like banking, IT and services and these sectors would not have a material bottomline impact due to the rise in commodity prices. The overall trend of more upgrades than downgrades is likely to continue post Q4FY21 earnings.

Small and midcaps outperformed benchmarks in FY21. Do you think the momentum will continue in FY22?

As more monies flow into the market through FIIs and domestic investors, deepening of flows to small and mid-cap stocks will be a natural progression. As long as there is sustained growth in the economy, percolation of flows down to the next level of companies would continue. Sustainable growth will attract monies irrespective of market capitalisation of the underlying stock.

The market had a strong FY21 with nearly 70 percent gains. Do you expect the trend to continue in FY22? What could be the returns in FY22?

FY21 returns were on the back of the massive dip in markets at the onset of the coronavirus pandemic in March 2020. The smart recovery from the low base is the reason for the high YoY returns. Returns in FY22 will surely be more subdued when compared to the 70 percent return seen in FY21. We believe that the returns should be commensurate with the earnings growth that will pan out in FY22 and could be adjusted for the euphoria seen in FY21.

Which will be the factors that will support the market in FY22 and those that can spoil the party?

The major factor that could support markets in FY22 would obviously be the actual earnings across the spectrum. That apart, return of mutual fund flows (net negative flows for 9 months back-to-back) and continuity of the FII inflows would positively support markets. Commodity, fuel prices and food prices could dampen returns if they remain in the inflationary mode. Normal-to-marginally low monsoons would not affect markets but a failed monsoon or droughts in various states could surely affect investment sentiments. Interest and exchange rates have been quite well managed by RBI. A substantial (over 50-100 bps) increase in interest rates could surely affect economic recovery.

US bond yields have gradually been moving northwards amid likely recovery in the US economy. What does it mean for Indian equity markets and FII flow in emerging markets, including India?

While the rise in US bond yields and concurrent bounce in the dollar index may have led to the weakness in Indian equities and other emerging markets as well) and has resulted in subdued inflows. However, the economic growth attractiveness remains with certain emerging markets like India and that will keep on attracting foreign flows.

The massive support being given by the US and EU governments to their industries and individuals has increased (almost double than pre-COVID era) savings rates in these economies. This would lead to increased investments and hence flows to growing emerging economies. Unless growth stutters in India, the foreign flows are likely to continue, albeit somewhat lower than in FY21.

Which are the key sectors that one should add or continue to hold in the portfolio for FY22 and why?

Among sectors, we continue to prefer large private banks, consumer electrical goods, auto ancillary, specialty chemicals, information technology and selective material companies like paints and cement.

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