Amit Shah, Head of India Equity Research, BNP Paribas, says that India is better prepared to handle the second wave of COVID, and with vaccinations also increasing, he does not expect COVID-related impact on the economy to be broad-based as was seen same time last year from an earnings perspective.
Shah has over 10 years of experience in covering markets as well as Thailand and Malaysian Oil & Has companies. He took over as head of India research in March 2020. Prior to joining BNP Paribas, he was at Thomas Weisel Partners covering US Oil & Gas names.
In an interview with Moneycontrol’s Kshitij Anand, Shah said that Nifty trades at 20.5x forward earnings with expected earnings growth of around 25%. India also has the tailwind of the growth-centric Union Budget and the supportive monetary system
edited excerpts:
Q) What is your take on the MPC committee decision of the April meeting as well as the future outlook?
A) Overall, the central bank reiterated that it is likely to maintain its accommodative stance as long as necessary. The focus has been on ensuring liquidity in the system and also aiding growth.
The second wave of COVID is a concern but at this point, it looks manageable. GDP growth forecast of 10.5 percent for FY22 has been retained, while the inflation forecast has been marginally increased which bodes well for the long-term economic outlook.
Against the backdrop of the second wave and the risk of partial lockdowns, we view the policy as a positive for the whole banking sector.
The Bank Nifty has already corrected by about 13 percent from its 52-week high, factoring in the impact of the second wave.
Q) Archegos fire sale does remind us that we still live in a world that is vulnerable to external shocks. Top global banks such as Credit Suisse and Nomura have been burned in the fire sale and stand to loses close to $ 6 billion. What impact the event could have on Indian markets and offshore derivative instruments?
A) By now most of the dust has settled with regard to the Archegos fire sale as the banks involved are accessing the final losses with Credit Suisse announcing a USD4.7 billion loss related to Archegos.
We do not believe that there was a material impact on the Indian markets with regard to the Archegos issue; however, such incidents once again reiterate the importance of internal controls at banks and shocks to the financial system on account of non-fundamental factors.
Q) What is the kind of impact you foresee on Indian markets post the announcement of a multitrillion-dollar plan to rebuild America’s infrastructure by U.S. President Joe Biden?
A) We do not see any direct impact on the Indian markets on the back of the US infrastructure plan. However, if the plan results in a higher US corporate tax rate, it could benefit India as it would make Indian exports more competitive and drive manufacturing higher.
Q) Equity markets closed FY21 with gains of 70% but it happened on a small base amid the selloff seen in March 2020 due to the outbreak of COVID. What is your outlook on markets for FY22? Which asset class could outperform?
A) In hindsight the good part about the Indian market sell-off was that it happened very quickly which set the stage for a recovery. So, if we calculate from the pre-COVID peak, Nifty is up 20%, which is driven by a mix of earnings estimate upgrades and the global liquidity rush making it to emerging markets like India.
The Indian markets have sold off from their highs on the back of spike in the US 10-year bond yield as well as acceleration in COVID cases and also due to the spate of block deals, IPOs, OFS, etc., which totalled almost USD 3.5 billion, and lastly, the crude spike also was a reason.
We believe that post the correction, the valuations are more in line with other markets, hence, we do not expect the underperformance to continue.
In addition, India is better prepared to handle the second wave, and with vaccinations also increasing, we do not think COVID-related impact on the economy should be broad based as was seen same time last year from an earnings perspective.
The Nifty trades at 20.5x forward earnings with expected earnings growth of around 25%. India also has the tailwind of the growth-centric Union Budget and the supportive monetary system
Q) We closed March on a flat-to-positive note. How is April likely to pan out for investors? Any big events to track which could have a bearing?
A) While we do not see a material downside in the markets post the correction, we believe we are in the period of a lull as we await fourth-quarter numbers and also evaluate the extent of impact from the rising COVID cases.
This would make the markets range-bound, making way for sector rotation. The private banks look attractive after the correction in the Bank Nifty, and our recent discussions with management of the banks reiterate the growth outlook for FY22.
Our analysis of global IT services companies’ deal wins, pipeline, and management commentary indicates continued strong growth for the sector in coming quarters, led by a recovery in the Americas.
Large-cap companies will likely continue to report these larger transformational deals through the year, resulting in a narrow growth gap between large-caps and mid-caps with regard to growth.
We think the two big events for April will be the impact of the continued increase in Covid cases and also the movement in the US 10-year bond yield.
Q) Dollar near 5-month higher while US Bond Yields inch higher. What is kind of impact your foresee on commodities? And, impact on commodity-linked stocks/sectors?
A) Steel prices remain high and metals overall as a sector have performed well. Oil prices have come off from their highs on the back of Iran and the US coming back to the negotiating table which can result in potential Iranian barrels coming back to the market.
Historically, periods of sharp economic recovery bode well for commodities in general, and we do not see anything different this time around as well.
The oil & gas space, which is largely formed of PSU companies, can underperform in the near term, barring those which have specific catalysts or are utility kind of businesses.
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