Neeraj Chadawar, head – quantitative equity research at Axis Securities, said ‘Value’ as an investment style has outperformed all the other styles in the last year by a significant margin but ‘Growth’ has started to catch up. We believe both ‘Value’ and ‘Growth’ will outperform the market in the next 12 months.
Engineer turned equity strategist, who has over a decade of experience under his belt, believes that India’s structural growth story is intact.
Prior to this, Neeraj worked as an equity strategist for institutional clients at PhillipCapital and was responsible to generate top-down & bottom-up investment ideas on sector rotation and theme-based model portfolio for the Indian market.
In an interview to Moneycontrol’s Kshitij Anand, he said they have raised their target for Nifty by December 2021 by 7 percent to 17,200.
Edited excerpts:
Q) Indian market seems to be in a firm bull run. But, weak global cues could be a spoiler in short term. What would you advise investors?
A) The month of February turned out to be a roller coaster ride with the first trading day of the month seeing around 5% rise in benchmark Nifty (Union Budget Rally) and the last day witnessing a correction of around 4%.
Even though there was higher than long-term average volatility, the market trend was constructive. The trend across the core sectors was very strong during the month, which is a significant positive.
While the market saw positive traction during the month, there were marked changes in the global interest rate cycle, and doubts are being cast on the ‘Lower for Longer’ trend of interest rates.
There is little doubt that the 2020 pandemic rally was driven by significant FII buying, which was driven by multiple factors, including the low-interest rate regime.
The upward shift of interest rates will present short-term challenges for the market but the structural growth story for India is intact.
We recommend the ‘buy on dip’ strategy for the long-term investors. The earnings trend for Q3FY21 was very robust with 38 out of the 50 Nifty companies beating consensus expectations.
Consequently, our FY21 and FY22 earnings forecast has been upgraded by 9 percent and 8 percent, respectively. We have also upgraded the FY23 earnings forecast by 7 percent.
Our target for Nifty by December 2021 also moves up by 7% to 17,200.
While the weaker global cues could be a challenge for the shorter run, but the structural growth story for India is intact.
Sector rotation will be the key to generate outperformance and we believe that a well-managed business (where the earnings and growth visibility is high, return ratios are very good) will continue to do well irrespective of the weaker global cues.
Q) What is happening with commodities? Crude seems to be inching higher, we are seeing some action in metals as well. Do you think we are entering Commodity supercycle for the first time since 2008?
A) Fluctuations in oil prices often gain widespread attention. This time again crude prices are inching higher from the past few weeks on vaccination optimism and improved growth outlook for 2021, reflecting the expectation of stronger global economic recovery in the second half of the year.
It is very early to say that we are entering into a supercycle or not, but an upswing in oil has started from the last few weeks on account of supportive fiscal and monetary policies which are translating into faster post-pandemic recovery.
Rising yields are reflective of improving economic conditions in anticipation of rising inflation. However, it remains to be seen the assessment of the economy by US Fed in the upcoming meeting, which is scheduled next week.
Additionally, as long as the dollar is weak, the commodity rally is likely to sustain. On the contrary, strengthening of the dollar on account of a further spike in bond yields will create pressure on commodities.
Q) A lot of beaten-down stocks are beginning to get buyers’ attention. Any Dark Horses which investors can look at and why?
A) Value as an investment style has outperformed all the other styles in the last year by a significant margin but growth has started to catch up. We believe both ‘Value’ and ‘Growth’ will outperform the market in the next 12 months.
We also find that Value is seeing tremendous traction in the beaten-down sectors. PSU banks have delivered negative returns in 2019 and 2020, but have staged a major catch-up rally in the last 3 months.
PSU banks were up by a whopping 90% in the last three months and continued their outperformance in the last one month.
We believe that this trend is sustainable in 2021 as many are coming out of a prolonged period of underperformance, trade at attractive valuations, and offer the comfort of long-term dividend payouts.
Q) Gold also seems to be inching towards a bear market (a fall of 20% from the highs). What investors do with the yellow metal?
A) Currently, we are maintaining our Neutral stance on Gold while gold will continue to attract investments for hedging risk against other asset classes. We had already expressed our view in our reports about the various scenarios that could stop the momentum in Gold, which played out in November.
Gold had lost its momentum due to ‘Risk on’ trade in the global market amid positive development on the vaccine front. Further, overall investor sentiment has improved in the last few months.
Now the investors are betting higher on riskier assets like equity, these improved sentiments further stoked by optimism on the vaccine roll-out process & faster than expected economic recovery. All these developments were keeping the gold prices under pressure.
Apart from ‘Risk on’ trade, rising bond yields are now the short-term negative for the gold prices, Fundamentally, Gold prices are inversely correlated with bond yields.
US bond yields have crossed 1.5% in the last week of February, rose by 40 bps mom, now investors are betting on US inflation which could pick up early on account of a faster economic recovery driven by fiscal stimulus and further pick up in the vaccination program.
The US Fed assessment on the current state of the economy will be keenly watched in the upcoming US Fed meeting. However, earlier US Fed had signalled that these interest rates will continue to be softer for a longer period of time.
We believe that FED will likely to continue with its stance on interest rates in the current scenario. Till the time we have clarity, short-term gold prices are likely to be range-bound with downward pressure.
However, gold will continue to attract investments for hedging risk against other asset classes & a passage of USD 1.9 trillion stimulus will be a key for a further rally in Gold. We continue our Neutral stance on Gold and recommend buy in dips strategy.
Q) Small & Midcaps have bulls favourite as the segment is turning out to be resilient even on dips as compared to benchmark indices. What is powering the rally in the small & midcaps space?
A) Mid-caps are trading at a 12% premium to large caps. From a valuation perspective, the Mid-caps look attractive vs. large caps. Historically, during the bull phase of 2017, midcaps were trading at 45 percent premium to large caps.
The success of the recent IPO in which 4-5 IPOs subscribed more than 100 times along with the latest IPO MTAR which got subscribed by more than 200 times has further boosted the overall confidence for mid and small-cap companies which is supported by improved liquidity and overall risk appetite.
With the opening up of the economy, investors are looking out for new ideas and the success of recent IPOs clearly indicates that the appetite for mid and small-cap stocks.
Further, our case for two-year rolling returns indicates that the market has turned in favour of small and mid-cap stocks which are more reasonably valued and offer greater upside potential.
Q) Amid the privatization buzz – what should investors do with the PSU space?
A) During the initial phase of this bull market rally till October 2020, the entire market narrative was positioned towards defensive plays with IT and Pharma stocks which were outperforming the market.
Since November, we are seeing a recovery in BFSI, Auto, Metals, Cyclicals (Ex Reliance). The budget has given a further boost to cyclical & rate-sensitive stocks which are now outperforming the defensive plays.
PSU stocks which were laggards till October have also started outperforming the market since November and have reached to pre covid level post-budget.
PSU stocks are coming out of a prolonged period of underperformance and are trending upwards especially after the Budget. We believe that this trend is sustainable in 2021 as many are coming out of a prolonged period of underperformance, trade at attractive valuations, and offer the comfort of long-term dividend payouts.
Q) Where is smart money moving especially in the last few weeks – global setup has changed a bit, and on the domestic front strong micro and macro data does suggest economic and earnings recovery in the offing?
A) All round recovery continues in Q3 with sustained momentum of demand recovery seen across the sector. Two positive trends of last quarter continue in Q3 also: a) visible expansion in the margin across the board led by better control over cost by the management and b) stronger-than-expected sales and volume numbers led by festive season reflect stronger economic recovery.
Commodity cost sustaining at a higher level remains a risk area for the margins, however, some price increase seen in Auto and consumer durable to mitigate the impact of higher input cost.
Cyclical and Rate sensitive sectors including BFSI hold the key; the corporate earnings are seeing strong traction with BFSI’s share in earnings rising over the next two years which is a significant positive.
Further, a closer look at the earnings upgrade for FY 21/22 indicates that the bulk of the upgrades have come from core sectors which include 50% earnings upgrade for the Metals sector for FY21.
BFSI has also seen double-digit upgrades and so has the cement sector. The earnings contribution of the BFSI sector is also rising to 38% in FY23 from the current 36% in FY21.
This is significant considering the already strong earnings trajectory of 23% CAGR for FY21-23E. The banks will still deliver solid returns in the next one year as there is valuation comfort in a number of stocks including the large PSU banks like SBI.
Q) How are foreign investors viewing India especially after rise in US Bond Yields?
A) Highest ever FII inflow was seen in the current financial year of USD 35 bn till February in the Indian equity market which is higher than net flow of FY10/11/12. ‘Risk on’ trade was seen in global markets from last four months based on more predictable policymaking under the Presidency of Biden, optimism over-vaccination & stronger than expected economic recovery has led to a realignment of global portfolios, with more investments were shifting to riskier assets, the emerging markets were the biggest beneficiaries of that huge FII flows.
Adding to that, India was on the sweet spot for the FII flows based on the higher differential between India’s earning yield and US bond yield.
However, from the past few weeks, a spike in bond yields has reduced the differential which is impacting the FII flows. Currently, Rising US bond yields and a sharp spike in Crude prices are the major concerns for the market in a short time.
However, rising yields and improving crude prices are reflective of improving economic conditions. It remains to see the further direction of the bond yields which will decide the behavior of FIIs in the shorter term.
The upward shift of yield will present short-term challenges for the market but the structural growth story for India is intact. However, the earlier emerging markets were likely to gain the benefit of a weaker dollar for 2021 on account of higher fiscal spending and lower yields.
Now doubts are being cast on the ‘Lower for Longer’ trend of interest rates. It remains to see the sustainable direction of the dollar under the scenario of rising yields and crude prices on account of higher inflation expectations.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
