The stock markets have been volatile in recent months. In year-to-date, the frontline indices S&P BSE SENSEX and CNX NSE NIFTY have corrected around 7.8 percent and 7.6 percent, respectively.
Foreign institutional investors (FIIs) have been on a selling spree, with their net selling of Indian equities rising upto Rs 2.26 lakh crore in current calendar year.
The Russia-Ukraine war, rising inflation – both on global and domestic front, rising interest rates, lockdown in China, surge in Crude Oil prices, fears of US recession, has weighed on the stock markets.
However, Shridatta Bhandwaldar, head-equities, Canara Robeco MF, is of the view that this is a good opportunity for retail investors for building their equity portfolio, if they haven’t done so yet. He also says that domestic inflation at 5-6 percent should not be something that stock market investors should worry about. Edited excerpts:
How do you see market valuations and earnings play out?
Corporate and bank balance-sheets are quite healthy right now. We have not seen such healthy balance-sheets from Indian corporates in last 7-8 years. This indicates that the manufacturing capex and overall investments by corporates will start gradually. There have been already some signs of a pick-up. But, just that there is so much uncertainty, first COVID and now Russia-Ukraine war. This has led to some delay in these capex plans.
Market valuations are at an attractive level and corporate earnings growth (for companies in benchmark Index S&P BSE 100) will probably be around 10-15 percent, which will be higher than most of the other economies. Even if the growth is at the lower end of this range, it will still be healthy growth compared to how global growth will look like.
There will be volatility and consolidation in the near-term. In the last one year, this is probably one of the better opportunities for retail investors to start allocating money into equities.
What are the major risks that markets face?
Flows from foreign institutional investors (FIIs) is likely to remain a challenge. Global investors have lost money in several places, whether it is emerging markets (EMs) – China, Brazil and Russia, US Tech, Fintech, Crypto Currencies. So, naturally they have started to pull out money from where they were making profits and that was India. The pace of selling will ease gradually, but it will not turn positive suddenly.
Export-focused sectors such as Information Technology (IT) and commodity will see moderation or slump in growth. Deep cyclicals like commodities face larger headwinds. That’s where you'd see the larger impact on earnings and stock prices. The impact will be moderate in IT as these are well-entrenched businesses.
The other risks are Crude Oil prices going back to $125-levels or earnings growth coming down to single-digits for an unforeseen reason.
How do you see inflationary pressures from hereon?
There have been several global headwinds. The Russia-Ukraine war has worsened the global economic environment and has delayed the inflation from correcting itself.
In hindsight, the fiscal and monetary stimulus by governments and central banks over the last two years was higher than what was required. This led to higher demand, which was more than what supply chains could handle as Covid-19 caused disruptions. So, inflation rose.
However, economists and central banks saw this inflation as transitory. As monetary and fiscal support is reduced, demand will reduce and so inflation will correct itself; that was the thinking back then.
But even as monetary and fiscal support has reduced, the war and lockdown in China accentuated supply chain issues. This has kept the inflation higher.
Now, the only choice left for central banks is to reduce demand and growth, as supply chain issues cannot be fixed overnight.
Inflation will reduce gradually. First, the liquidity has to reverse, which has already happened. Then growth will moderate and then inflation will ease.
How will inflation move on the domestic front?
Domestic inflation is not a concern if we compare with historical levels. Barring the period between financial year 2015-2016 (FY16) and financial year 2018-2019 (FY19), we have always run inflation at six-seven percent. Inflation is a worry, when it is significantly higher than your ten-year G-sec papers’ yields. This leads to negative real interest rate, which is the case in US, but not here in India.
As long as domestic inflation is between 5-6 percent, it is healthy inflation. The past track-record also shows that inflation around this range doesn’t impact equity returns. It will start to hurt growth if inflation rises to 8-8.5 percent.
Which sectors are you bullish on?
We are positive on domestic-focused sectors, where we expect an earnings upgrade cycle to play out. So, industrials, financials, auto, consumer discretionary, housing, telecom, domestic pharma and hospitality, these are the sectors we think are relatively better-placed.
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