Don#39;t worry too much about rising bond yields but do monitor these 2 risks, says Devang Mehta of Centrum Wealth


Devang Mehta, Head–Equity Advisory at Centrum Wealth, thinks ebbs and corrections are all part of the so-called structural bull market and one has to live with them. He advises keeping an eye on the increase in bond yields but says it is not something to be too worried about at this stage.

India is being looked at a strong alternative to China and it will help in sustaining the flow of funds. With domestic investors buying equities on every fall, the market will find support on a substantial dip, Mehta says.

In an interview to Moneycontrol’s Sunil Shankar Matkar, Mehta says the corporate numbers for the next three quarters will be strong as they will have a favourable low base. Edited excerpts:

Q: Do you foresee a 10-15 percent correction in the coming weeks, given the rising US bond yields, mounting geopolitical tensions and an overvalued market? Do you agree with experts who say the market is overvalued?

Our markets have been rising in sync with the global markets. Continual foreign flows have created a buying momentum, which has sort of defied logics of valuation. But that’s the way markets are, in the shorter to medium term, liquidity rules the roost and over a longer period, fundamentals come into the picture.

There are two schools of thought as we discuss the US bond yield conundrum. One school worries about inflation fears and the other says there is not much to worry about. The rise in commodity prices, container shortage, etc seem more transitory in nature and one cannot expect them to keep on rising. However, one has to keep a close watch on employment and wages picking up in the next few months, as lockdown exits start picking up across the world. More savings and return of consumer confidence can push prices higher and inflation could raise its head. It still remains to be seen whether this is a structural uptick in inflation or whether this is more of a transient nature.

The Federal Reserve Chairman Powell was very good at talking down bond yields. Also, the RBI, so far, has been adopting a growth-oriented mindset and an accommodative approach. We should keep an eye on the increase in bond yields but it is not something to be overly worried about at this stage.

The biggest takeaway for our markets is the return of strong earnings growth, which will sort of allay valuation concerns going forward. Ebbs and corrections will be part of this so-called structural bull market and one has to live with it. India being looked at as a strong alternative to China will also help in sustenance of flows plus the domestic investors want to buy equities on every fall, will support markets on any substantial dip.

Q: The government has allowed all private banks to participate in its business. Do you think concerns related to banking stocks are over now and will the government announce more measures for the banking sector?

It seems that the worst of the asset quality concerns are behind us. Lots of provisioning has been done by most of the banks. Many private banks have been at the forefront of raising capital and in fact, the focus can now shift from asset quality concerns to loan growth.

Banks are leveraged plays on the economy. The decision to allow private sector banks to conduct government banking transactions is the first step towards the privatisation of a few state-owned banks, as announced in the Budget. India’s private lenders have been at the forefront of implementing digital banking initiatives, and this will now allow them access to a larger market through the government’s businesses. Support from private banks will be vital, as this would ease serving the last-mile delivery of financial services in rural areas. Besides, the lifting of the embargo will also give private banks an opportunity to enlarge their customer base. The decision will enable private and state-owned lenders to be on equal footing on execution of the government’s economic and social initiatives goes.

Q: What do the rising US bond yields mean for investors and traders and also for Indian equities?

Bond market cues often reflect in equity markets. Bond yield, simply put, is the annual return one gets on a bond. Bond yield and prices move in reverse directions. The government is the biggest issuer of bonds. It issues bonds to raise money to fund expenditure. So, when yields go up, the borrowing cost of the government goes up. Last week, the US 10-year yield climbed to 1.614 percent, which is the highest in a year. Concerns over inflation in the US is the reason behind rising bond yields. The bond market is expecting the likely rise in inflation to push the US Federal Reserve to either lower monthly bond-buying or hike interest rates, an adverse factor for markets like India, which have been a major recipient of foreign inflows of late. This is despite the US Fed’s reassurance of keeping the low cost of money intact.

Indian markets have seen a furious rally in the past couple of months due to strong foreign flows, improving macroeconomic parameters and return of corporate earnings growth. The makings of a structural bull market remain intact for India. Such phases of wild corrections will provide opportunities for long-term investors to take advantage of volatility and accumulate quality businesses at reasonable valuations and price points.

Q: What would be major risks for the Indian equities in the coming months and can these risks dampen the sentiment?

A sharp jump in global commodity prices is one reason for the market to ponder, as it will stoke inflation and push interest rates higher. A watch on global bond yields and the way they behave will also be an important monitorable. For India, the speed and the efficacy of the vaccination drive will be a crucial factor to watch, so that the economic recovery sustains and gains momentum with consumer and businesses gaining more confidence to spend and expand, respectively. Also, the fourth quarter and the annual numbers from corporates which will be announced in April will decide the pace and trajectory of earnings upgrades, which will then be able to justify premium valuations.

Q: What is your take on the December quarter earnings season? Do you expect Q4 to be stronger than Q3 earnings and will the re-rating continue?

Corporate numbers for the next three quarters will be extremely strong as they will have a favourable low base. Most of the story, so far, has been centred around bottom-line growth due to expansion in margins led by operational efficiencies, cost cutting, etc.

With demand momentum coming back in almost all sectors with the exception of few due to restrictions or COVID-19 led fear, earnings growth cycle seem to be on the cusp of a multi-year uptick. There have been more upgrades than downgrades after a long while. However, most of the company managements have shown a skepticism on the sustenance of margin expansion due to high raw material costs led by crude, copper, etc.

Q: What are the key sectors that can get re-rated in terms of earnings and stock performance in Q4 and FY22? What should be bought in the current fall?

Some of our favoured sectors are building materials (paints, adhesives, electrical goods, cement), financials (top private banks, select NBFCs, life and general insurance companies), consumer discretionary and non-discretionary, IT and automation, niche MNC pharma companies along with diagnostic laboratories and CRAMS, agro and speciality chemicals and select capital goods companies.

The view is to have a balanced portfolio to take advantage of India’s strong demographics on one hand and the impending Capex cycle recovery or investment-led growth on the other hand.

One has to buy and accumulate companies that exhibit qualities of market leadership in its segment, agnostic to its market cap. All the superior qualities of high return on equity, robust earnings growth, pricing power and sound corporate governance are crucial in an environment, where people can get carried away and take wrong decisions to make a quick buck.

Do remember that “mistakes are made in Bull markets, but realised during bear markets”.

Q: Do you think the measures announced by the government are enough or is more needed to make India a $ 5-trillion economy by 2024?

There are a host of steps taken by the government in the direction of making India a $ 5-trillion economy. A concept of “bad bank” would give banks the much-needed room to focus on core activities instead of fretting over their impaired loans. These will enable bankers to focus on their core activity of lending. Huge spending on infra and other allied industries will lead to more job creation. Some steps, which have been taken for ease of conducting business and making compliance simpler, will enable foreign capital both in the form of FDI and FII reach Indian shores.

PLI schemes, import protection, cutting out the leakages, etc also will boost the corporate confidence and profitability and help India migrate to the new orbit.

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