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Ajit Mishra, VP Research, Religare Broking, says if the second coronavirus wave peaks over the next two weeks, earnings will largely remain unaffected as strong pent-up demand, which was seen last year, would continue on the back of support from the government and the RBI.
But he thinks it will be prudent to tamp down return expectations in the current fiscal and stick to the ‘bottom-up’ approach in investing. While global cues are and have kept Indian markets steady, the coronavirus situation and reopening of the business activities will decide the market performance, Mishra says in an interview to Moneycontrol’s Sunil Shankar Matkar. Edited excerpts:
Do you think the first-quarter earnings will feel the impact of the surging COVID-19 infections and will they COVID-19 also weigh on the full-year growth?
The first-quarter earnings are likely to be impacted severely due to increasing COVID cases, which has led to strict lockdown restrictions imposed by several states. However, we expect the intensity of impact to be much lower as compared to last year due to state-wise restrictions. For the full year, if we see the cases peak out in the next one-two weeks, we expect minimal impact on earnings as strong pent-up demand, which was seen last year is likely to continue on the back of constant support from the government and the RBI. Further, low interest rates would also aid recovery in aggregate demand.
Do you still expect double-digit GDP growth in FY22?
Prior to the second wave, the GDP growth was expected to be double-digit on the back of a favourable base, noticeable measures taken by the government and timely support from the apex bank. However, the rising second wave infections have dented hopes of a double-digit recovery as increased restrictions from state governments would impact economic activity. While we do expect GDP growth to be impacted, we believe the growth would be around high single-digit for FY22.
What should investors buy if the fall continues and the sentiment remains weak for a couple of months?
We believe the fall would give a good opportunity to accumulate cyclical stocks. The increased spending announced from the government in the budget and strong liquidity support from RBI coupled with low-interest rates bodes well for a strong economic recovery.
Moreover, if the sentiment remains weak for a couple of months, it would be cyclical which could be impacted and that may provide a good entry point to investors as valuations remain stretched. We believe accumulating quality stocks in sectors like auto, banking (preferably private), capital goods, consumer goods and cement would be a prudent choice.
Do you expect the rupee to weaken further and sink to its record lows? Will it impact the FII flow too?
In the past few months, we have seen strong inflows in anticipation of strong economic and earnings recovery. Currently, investors, both domestic and foreign, are hopeful that the current wave of the virus would peak soon and are trying to look beyond the second wave. However, if the cases continue to spike, we could see more restrictions that would impact flows from FIIs, leading to currency depreciation.
Since the beginning of the last lockdown, auto, pharma, IT and metals witnessed triple-digit gains. We are in the middle of a lockdown-like situation again, can you name the sectors that can give triple-digit gains by April 2022?
It is very ambitious to expect triple-digit returns in the next one year from any sector, as mostly are already trading near their lifetime high and all the good news of economic and earnings recovery seems to be priced in. Nonetheless, we expect healthy returns from domestic cyclical like auto, cement and capital goods.
Apart from COVID-19, what are the other risks one should consider before taking positions in the market?
At present, rising COVID cases continue to remain the biggest concern. However, rising commodity prices are a cause of concern for Indian markets as this would lead to a spike in inflation and impact the profitability of companies due to lower operating margins. Another concern would be the rising bond yields and interest rates in the medium to long term. While the Fed has made it clear that it would keep the interest rates steady, but rising inflation pressure could prompt the Fed to tone down its dovishness. And last but not the least, we feel the pace of vaccination drive could also be the key factor in deciding the roadmap of the economic recovery ahead. The government has already lowered the age limit to cover the maximum population, however, it won’t be easy to overcome the challenges related to manufacturing and logistics citing dependency on various external factors. The government and vaccine manufacturers are already in talks over these issues and the approval to other global manufactures will help in subsiding this risk to some extent.
Will the market mood change in the second half of FY22 and can we expect the year to end with strong double-digit gains?
Considering the scenario, we feel it’s prudent to tone down return expectations in the current fiscal and maintain the ‘bottom-up’ approach in investing. While global cues are buoyant and have kept Indian markets steady, the virus situation and reopening of the business activities will play a decisive role in the market performance in the following quarters. We do maintain our positive stance in anticipation of strong economic recovery however the domestic risks cannot be ignored.
Disclaimer: The views and investment tips expressed by 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.
