Gaurav Dua of Sharekhan feels one cannot expect similar action seen in FY21 this fiscal. “Valuations are not so cheap anymore and the street is already factoring in earnings growth of 25 percent CAGR over the 2-year period FY21-23,” he said in an interview with Moneycontrol’s Sunil Shankar Matkar.
Benchmark indices rallied around 70 percent in the financial year 2020-21 largely due to extreme sell-off seen in March 2020, along with speedy economic recovery and healthy foreign inflows in equities in India.
According to him, earnings season is likely to be healthy and could end with further upgrades in consensus estimates for Nifty/Sensex earnings for FY22 and FY23.
Edited Excerpt:-
Q) Market had a strong close in FY21 with nearly 70 percent gains. Do you expect the same kind of trend to continue in FY22? What could be the likely market returns in FY22?
A) With markets hitting the bottom last March, the gains of 70 percent are largely due to the low base effect along with speedy economic recovery and healthy foreign inflows in equities in India. Obviously, you cannot expect similar movement this fiscal. Valuations are not so cheap anymore and the street is already factoring an earnings growth of 25 percent CAGR over the 2-year period FY21-23. Thus, the expectations need to be adjusted accordingly and a more realistic number would be in the range of 12-14 percent returns in benchmark indices. But the returns in the broader market could be better and equities would be among the best performing asset class in FY22 also.
Q) What could be the factors that can support or worry the market in FY22?
A) Three key factors essential for sustenance of the rally are: easy liquidity globally, healthy growth in corporate earnings (inline or better than street expectations) and progress on pragmatic policy measures like PLI, privatisation/monetisation of operational & surplus assets of public sector units. On the other hand, the inability to curtail the second wave of COVID-19, rising US bond yields (and stronger US Dollar) and surge in inflationary trend are the key risk to equity markets in the next one year.
Q) Do you expect better-than-expected earnings in the March quarter? Also, do you expect the trend of more upgrades than downgrades to continue after March quarter earnings?
A) Unlike the past two quarters, the rising commodity prices would put pressure on margins across many sectors in the March quarter results and consequently, limit the growth in earnings in some key sectors. However, the earnings season is likely to be healthy and could end with further upgrades in consensus estimates for Nifty/Sensex earnings for FY22 and FY23.
Q) The US bond yields have gradually been moving northwards amid likely recovery in the US economy? What does it mean for Indian equity markets and what should be your reading with respect to equity market and FII flow in emerging markets including India?
A) Rising bond yields in the US is driven by improving outlook on economic recovery. Though this could strengthen the dollar and create volatility in emerging markets in the short term, the revival in the US economy is good news for equities in general. In the past also, there have been phases of strong economic growth globally accompanied by rising bond yields but equity markets also doing well. So, as long as there is orderly movement in bond yields it should not spoil the party in the emerging market equities.
Q) What are the key sectors that one should add or continue holding in portfolio for FY22 and why?
A) One needs to readjust their individual portfolios in line with three key investment trends expected to play out over the next 12-18 months. First, we expect continued re-rating of public sector companies triggered by policy changes as indicated in the Union Budget. Second, cyclical stocks could lead the rally so one could increase exposure to banks, building material (cement, steel, tiles etc) and industrials and reduce exposure to defensive sectors like IT, pharma, FMCG among others. Lastly, there is a strong case for the outperformance of midcap/smallcap to largecap. Thus, it would be prudent to increase exposure to quality midcap companies.
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