Given the structural trends we are seeing on the economic recovery front, FY-22 is also likely to be a good year for equity investors, Mohit Ralhan, Managing Partner & CIO, TIW PE, said in an interview with Moneycontrol’s Kshitij Anand.
edited excerpts:
Q) Do you think the current rally is fuelled by global factors?
A) The current market rally is largely fuelled by high liquidity and there is always a risk of when and if the US Federal Reserve would start winding down.
In this context, the recent announcement of the Fed was extremely critical. It’s counterintuitive that an increasingly positive outlook on the economy was accompanied by a signal of keeping the interest rates near zero through 2023.
It indicates the kind of stimulus required to pull the economy out and how unprecedented it has been. But, it’s a long commitment anyways and a faster economic recovery may encourage a rethink.
One notable development was that four out of eighteen Fed officials forecasted a rate increase in 2022 and seven Fed officials forecasted a rate increase in 2023. The Fed also announced that it would continue its bond purchase at the rate of US$ 120 billion per month.
On the domestic front, India has been recovering quite well on the economic front and the India allocation in the global portfolios are expected to increase. Overall, the outlook is bullish with only a limited risk of uncontrollable re-emergence of COVID-19.
Q) The recent rise in the US Bond Yields above 1.7% has resulted in a knee-jerk reaction on D-St. Which is the level that will reverse the trend for equity markets as money will rotate from equity to bonds?
A) Typically, when interest rates are low, it decreases the borrowing costs of corporates resulting in better earnings. It also means lower cost of capital which increases the valuation multiple of stocks.
Lower interest rates also lead to higher bond prices. But, we are in a bit of a conundrum. The US Fed has signalled its willingness to let inflation spike. It is willing to keep the interest rates near zero even when the economy recovers sharply from where it is right now, leading to high inflation expectation which has spooked the bond markets, and thus leading to a rise in the US Bond yields.
The rise in treasury yield changes the cost of capital which is used to value all kind of assets including stocks. So, it’s like something facing two opposite forces. It will lead to volatility, which is what we are witnessing in Indian markets as well.
If you look at the overall picture, the Treasury yields are still lower in comparison to the 3% odd levels, which is the three-year high.
The issue has been the accelerated rise in the yields from 1% to 1.7% in a matter of few weeks, which brings volatility and increased uncertainty.
The US Fed has emphasized that the higher inflation will only be temporary. The most critical aspect is if Bond investors believe in the same, otherwise, the Bond Yields may continue to rise and a greater risk will be a rapid rise.
As far as stock investors are concerned, a rise in yield definitely puts downward pressure on valuations but if it can be more than covered by rise in earnings, then the stock prices will continue to rise.
Right now, the view is bullish with a combination of higher earnings growth and the expectation of high inflation is a temporary phenomenon. The risk will be a rapid rise in yields to more than 2.25% or 2.5%, rapid being the key word.
Q) The FY21 resulted in a good 70% rally in Sensex and Nifty. Do you think investors should now pare their expectations for FY22?
A) The 70% rise in FY-21 was on a low base, since the market has fallen significantly in Mar-2020. So, FY-22 is not likely to be a 70% rise year. But, given the structural trends, we are seeing on the economic recovery front, FY-22 is also likely to be a good year for equity investors.
On the domestic front, although there is a risk of rising COVID-19 cases, we believe that it will also get contained and the accelerated vaccination will further make full mobility possible by June/July.
So, FY-22 may be a solid 15%-20% gain year but not the 70% gain of FY-21.
Q) Which sectors are likely to hog the limelight in FY22?
A) There is a risk of time correction if not price correction in FY22, especially on the large-cap side. While the significant economic recovery should ideally lead to a 15-20% growth in large-caps, in the short-term risk have gone up due to expectations of global inflation going up.
There is expected to be a bull run on commodity prices and therefore the sectors linked to such commodities are likely to be in the limelight. Metals can be a good bet. Real Estate, Building Materials and Auto are also likely to do well.
Q) Small & Midcaps came to the limelight in FY21, and do you think the momentum will continue in FY22 as compared to large caps and why?
A) The momentum is likely to continue, as, the small and midcap companies are expected to have better earnings growth on the back of economic recovery.
It is a fairly large group of stocks and investors need to be better stock pickers to benefit from rally in mid and small caps. We think that FY22 will be a year of small & mid-cap and the right selection of stocks can give 20%+ returns in FY22.
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