In an interview with ETMarkets, Kumar with over 2 decades of professional experience in the area of fund management and macroeconomics, said: “From a sectoral standpoint, we reckon the next major move in markets will be driven by domestic facing sectors like BFSI, discretionary consumption, Auto, capital goods etc. and would be the themes for Samvat 2079,” Edited excerpts:
Do you see fresh record highs for Indian markets in Samvat 2079?
India has emerged as a shining star in CY22 and has outperformed the global markets significantly amidst varied global macro headwinds.
Indian equity markets have demonstrated their sheer resilience and structural strength by navigating effortlessly despite being confronted with a myriad of crises such as the Russia-Ukraine standoff, the US Fed’s hawkish stance & rate hikes, persistent high Inflation with commodity prices going to all-time highs, the energy crisis in Europe, chaos in rates and currency markets along with unprecedented FII selling.
While the global headwinds still continue to cloud the outlook for Indian markets and impart bouts of volatility, we reckon structurally Indian markets are in relatively good stead with strong economic and earnings recovery at sight led by strong domestic factors like strong consumption, multi-year investment cycle etc. which will continue to provide tailwinds and cheer the markets.
High-frequency indicators such as PMIs, GST, Electricity demand, Tax collections, etc. continue to remain significantly in the expansionary zone, despite the global data points cooling off/moving into contraction.
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Having said that, volatility is inevitable and here to stay as global growth concerns come to the fore, but despite some delays, we believe the markets will have a positive trajectory over the ensuing quarters.
Overall, the outlook for Indian markets remains from a structural standpoint and is indeed here to stay from a medium to long-term perspective.
From a global perspective too, we are a bit more optimistic and believe that worst is behind in terms of peak inflation and the US Fed hawkishness and from hereon we will see the elevated base catching up and the cumulative impact of the Central banks play out and hence would lead to stabilisation in global markets.
What is your take on the recent results from the IT sector for the quarter that ended September? What is your preferred list?
The earnings season has kick-started on a good note with front-line IT companies delivering strong growth and margin performance.
However, in terms of outlook going forward, we are still a bit cautious on the sector. The sector is an export-oriented sector and with global growth rates slated to come down next year, we are bound to see some moderation in IT companies’ growth rate next year.
The sector grew at a scorching pace after COVID led to the shortening of the digital transformation cycles of the major corporates.
Such strong growth led to significant PE multiple expansion which started bordering on the Euphoric zone with the forward multiple going closer to 30X.
With the recent 30% correction in the sector, valuations though have become far more reasonable but still not cheap enough to warrant a decisive overweight stance on the sector.
The sector continues to generate significant cash flows and has perhaps also has the best capital allocation policies which will be supportive of the valuations.
In terms of our pecking order, we remain biased towards large-cap companies versus mid-cap companies, owing to our better ability to navigate the slowing growth environment.
What are your big themes for Samvat 2079? Where can investors look for wealth-creating opportunities?
We believe Indian markets despite the current valuations, offer investors a perfect recipe for creating wealth and the outlook for India’s earnings cycle remains positive despite the adverse global macro-economic backdrop of rising interest rates, turmoil in currency and rates markets, and an imminent global growth slowdown.
We believe in the current global landscape; India’s positioning is quite favourable from a domestic standpoint and that Indian markets are at the cusp of a virtuous new earnings growth cycle.
The current macro backdrop this time around is quite conducive with resilient domestic GDP growth, better Inflation management, deleveraged corporate balance sheets, and fortified financial system balance sheets with lower NPAs and strong credit offtake, thus adding credence to our belief that strong momentum in India’s corporate earnings growth cycle is imminent.
Further to add on would be the strong and supportive supply side reforms by the government such as PLI, Atmanirbhar Bharat, and the focused thrust on Infrastructure CAPEX will further act as a catalyst for India’s earnings growth cycle.
From a sectoral standpoint, we reckon the next major move in markets will be driven by domestic facing sectors like BFSI, discretionary consumption, Auto, capital goods etc., and would be the themes for Samvat 2079.
How are FIIs looking at India, especially after recent US Fed rate hikes?
At the outset, yes FII’s have been jittery in response to US Fed’s interest rate hikes and unwinding of the monetary stimulus and have been consequently relentless sellers in Indian markets during the period Oct-21 and Jun-22 (withdrew ~Rs.3.84 lakh Cr).
However, the tide had turned positive during Jul-Aug-22, when FII’s became net buyers in Indian markets, but again turned sellers during Sept ’22-Oct’22 YTD given the surmounting pressures from the current global macro headwinds.
One of the key reasons for FII selling has been relentless strength in the USD. FII measure their returns in USD terms and during period of such extreme USD strength, it is natural to expect FII to take off some exposure from the Emerging markets.
Also, the fact that fairly substantial money into India comes via ETF route. So, when heavyweight countries such as China, Korea & Taiwan have done poorly, EM investors have been withdrawing money from EM and consequently, India too has faced collateral damage.
Another factor that explains FII selling is that the massive outperformance of Indian markets in the EM space has led to India’s weight in the portfolios going up disproportionately and consequently FII’s have been re-balancing their portfolio by reducing Indian exposure.
However, we believe that these adverse factors are short-term & technical in nature and FII’s continues to view India very favourably owing to a strong domestic economy.
Going forward, while US Fed rate hikes may lead to some volatility in FII flows momentum in India (& overall EM’s) in the interim, we reckon that the current FII selling is just a near-term phenomenon.
As we believe, we are closer to the peak of FED Hawkishness and Inflation fears and that narrative could soon turn towards growth fears versus inflation fears, which will likely lower FED’s hawkishness. This should further aid the FII flows into emerging markets viz. Indian equities.
Besides, we believe FII’s will continue to stay invested in Indian markets from a long-term perspective, as India’s long-term structural growth story appears promising and lucrative and that India will likely remain the fastest growing among Emerging markets, which should bolster FPI confidence.
What is your take on the rupee? Do you see further depreciation against the US Dollar in the next 12 months or Diwali 2023?
Given the US fed’s aggressive stance on policy normalization, global currencies, including INR, have been under pressure.
While INR has already depreciated by ~10% against USD in CY22 much of this depreciation can be attributed to the strengthening of USD as aggressive rate hikes by the Fed this year have led to a narrower interest rate differential.
Thus, in this context, INR continues to hold its fort and has performed much better than its EM counterparts which have depreciated higher.
Besides, when seen in the context of DM currencies too, India has fared relatively well (Yen is down 30%, Euro is down 15%, GBP is down 16%) and in that context, 10% INR depreciation is very good.
While US Fed’s aggressive tightening in the near term may impart some depreciation pressures on INR, we reckon the worst in terms of pressure on macro fundamentals (external account and rupee) is behind us with the softening of crude oil prices.
Besides, as stated above we believe that the worst of FII outflows is also likely over, as we are treading towards the fag end of rate hiking cycle given that growth concerns will start getting more pronounced and inflation will cool off.
Please share any key learning’s from Samvat 2078 and any advice you would likely give investors for the next Samvat?
Samvat 2078 has no doubt been a volatile year for Indian markets, thanks to the multitude of global and domestic factors being at play – viz. Geopolitical tensions, tightening liquidity, and aggressive stance by central banks due to high inflation led by high commodity prices & supply chain disruptions, FII’s relentless selling, the energy crisis in Europe, and turmoil in rates and FX markets.
However, despite being posed with all possible headwinds, Indian markets have been resilient and one of the key learning from this episode is to stick to the principle of – Buying when everyone is fearful and selling when everyone is greedy, as markets are strongly driven by the emotions of
Greed & Fear
While every volatile period does make an investor jittery and fearful, it also presents them with investment opportunities, and rightly so, Samvat 2078 has also presented investors with an opportunity to build a long-term portfolio.
Going forward, investors should capitalize on India’s inherent relative strong position against its global counterparts and invest in equities with a long-term horizon.
In terms of themes for the next Samvat, we would like to urge investors to be cognizant that from here on market valuations will be more a function of corporate profitability, healthy return ratios, and fortified balance sheets.
BFSI and consumption facing sectors such as FMCG, Auto, and infra push beneficiaries – capital goods would be the key themes for investment in Samvat 2079.
From a valuation perspective, while the current valuations may look slightly expensive, markets present an opportunity to compound wealth for a long period of time. Also, markets have had a reasonable time correction.
The returns over the last 12 months have been negative 5%, while earnings have grown at healthy double-digit and consequently, valuations have become cheaper versus 1 year back.
Thus, Indian equity markets present attractive opportunities given the compelling macro growth prospects in sight and we expect Indian equities to continue to command better valuation premiums compared to EM peers.
Given this construct, we remain constructive on equities as an asset class and history has exemplified that we should be believers in the ability of equities to compound wealth over a long period of time.
We advise investors to partake in the long-term potential of India and stay on course to leverage any dips, as an opportunity to buy.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)