Prasanna Pathak, Head of Equity, Taurus Mutual Fund feels the market may see a corrections due to high valuations, inflationary pressure and rising bond yields. “A 10-15 percent correction can happen during the current ongoing uptrend. In fact, it is considered to be healthy,” he said in an interview to Moneycontrol’s Sunil Shankar Matkar.
Pathak has more than 17 years of experience in research, finance and money management.
He said a disruption or tapering in the global liquidity and flows to emerging markets, like India, and weakening of the earnings momentum can be the major risks for Indian equities in coming months.
Edited Excerpts:-
Q: Generally what does the rising US bond yields mean for investors and traders, and also for Indian equities?
A rise in the bond yields generally tend to affect the prices of bonds negatively depending on the maturity profile of the securities. So, it affects an investor/ trader invested in a fixed-income instrument. A small and temporary pressure on yields may not result in much impact.
A large and structural change in yield may result in secondary impact on equities with higher interest rates and borrowing costs. This in-turn may impact earnings and valuations.
A large rise in US bond yield and interest rates will affect the flow of money to emerging markets like India.
Q: What would be major risks for the Indian equities in coming months and can these risks dampen the sentiment?
A disruption/ tapering in the global liquidity and flows to emerging markets like India and weakening of the earnings momentum can be the major risks for Indian equities in coming months.
Geo-political risks, sustained inflationary pressures, rise in interest rates globally and other factors which may impact the global flows as mentioned above needs to be watched carefully.
Q: Do you expect at least 10-15 percent odd correction in coming weeks given the rising bond yields in the US and geo-political tensions as well as overvalued market? Do you convince with experts saying the market is overvalued now?
A 10-15 percent correction can happen during the current ongoing uptrend. Infact, it is considered to be healthy. High valuations, inflationary pressures and rising bond yields may be the major reasons for the expected corrections.
A minor rise in inflation is actually good for the equity markets as that is a sign that growth is back. The entire purpose of the fiscal and monetary stimulus globally was to reflate the economy. Hence, small rises in inflation and bond yields may result in some corrections, but may not damage the on-going uptrend. However, one must be guarded against a major and sustained surge in inflation and interest rates. Hopefully, that is some time away.
Valuations do look expensive but are based on depressed earnings as of now. So, it seems, market is expecting that the recent trend of better-than-expected growth and earnings may continue in the next 3-4 quarters and take care of the valuations.
Q: What is your take on the December quarter earnings season ended in February? Do you expect Q4 to be stronger than Q3 earnings and will the re-rating continue in coming quarters?
December quarter was the second quarter after the September quarter where the earnings were much better than analysts expectations. We think, that the earnings momentum should broadly continue in the March quarter albeit with some impact on margin-front due to inflationary pressures.
Q: What are those key sectors which can get re-rated in terms of earnings as well as stock performance in Q4 and FY22?
With growth back into the economy post the lockdown and increased expenditure and stimulus in the Budget for the economy, I think, the core sectors and companies leveraged to capex-cycle should do well. These include the corporate Banks, capital goods, infrastructure, metals and commodities.
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 banking sector?
The recent results indicate that NPA issues are largely under control and adequate provisions seems to have been made. Also, many banks have raised capital and beefed up the Capital adequacy ratios. So, if growth in the economy sustains and capex-cycle starts, I think, majority issues related to banking sector will be sorted out.
Q: Do you think the slew of measures announced by the government so far are enough or needed more, to take India towards $ 5 trillion economy by 2024?
The government seems to be doing the right things for stimulating the economy and re-igniting the animal spirits. The reforms undertaken in the last few years, increased government expenditure and recent thrust on private participation and foreign capital for capex and growth are steps in the right direction. However, one needs to wait and watch as to how things evolve.
Q: Will the flow in equity and equity-oriented mutual fund schemes turn positive from March onwards?
With the sharp rise in equities from march-lows, the normal first level reaction for investors is to book profits. However, with the realization of changing fundamentals and good prospects for equities in the next 2-3 years vis-à-vis other asset classes, we believe that retail participation will be back, maybe after some correction in the markets.
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