Amish Shah, who has over 17 years of experience in the capital market, said that the biggest risk for Indian market is the onset of a potential third Covid wave. Investors are currently anchored to expectations of continuing economic & earnings revival, he said in an interview with Moneycontrol’s Kshitij Anand.
Shah, who is an India equity strategist at BofA Securities, prefers financials, industrials and materials sectors to do well. Edited excerpts:
Q) The latest US Fed minutes led to some volatility in equity markets across the globe. But, what is your take on markets for the near future?
A) Global events would continue to drive markets. From an Indian perspective, declining virus caseloads, and increasing vaccinations are positives – most high-frequency indicators that markets track would start to reflect an improving economic momentum.
However, we believe, to a large extent, this revival is priced in. In the near term, markets are waiting for 1QFY22 results to gauge the impact of second-wave/local lockdowns, especially for financials, industrials and consumer discretionary sectors.
Results, so far, have led to a marginal cut in FY22 Nifty earnings. For CY21, we expect overall market returns to be muted but we expect Financials, Industrials, Materials, and IT sectors to outperform.
Q) What are your views on sectors that are commodity play? Do you think the commodity supercycle is here to stay?
A) The commodity upcycle is driven by both supply and demand-side factors. Re-opening globally along with supply cuts, especially within the steel sector led by steel production curtailments in China, have been the key drivers for this boom.
We see headroom for further demand recovery across the world, including within India and should support commodity rally, albeit at a slower pace.
Our global oil analysts have recently increased their crude price forecast as they expect oil demand globally to bounce back while supply may not fully keep up.
We forecast Brent crude oil price for 2021 at US$ 68/bbl (vs US$ 63/bbl earlier) and for 2022 at US$ 75/bbl (vs US$ 60/bbl earlier).
We see the potential for export duty imposition on steel in China which will make exports for Indian steel players favorable: increased demand for exports in addition to strong domestic demand could support strong steel prices for Indian steel players.
We continue to remain overweight on the Materials sector Metals and E&P companies within the energy space.
Q) How are FIIs viewing India considering they have been net sellers in the cash segment for the past couple of months?
A) One needs to keep in mind that India saw a substantial US$ 23bn of FII inflows in CY20 and continues to see positive FII flows for YTDCY21.
Besides, India’s positive FII inflows were the highest among other Emerging markets in CY20 and India continues to be among top Emerging markets witnessing FII inflows YTDCY21.
FIIs in our view continues to be positive in India. Near term, FII flows were on the back of rebalancing, which is expected in face of the second Covid wave within India, the potential for rising bond yields in the US & potential for strengthening USD.
Q) Inflows declined in equity mutual funds in June while the SIPs continue to grow. Does it reflect that the most new investors prefer to go by the disciplined way of investing?
A) SIP flows have been very stable at US$ 1.0bn or higher for over 3 years now. Low mutual fund penetration in India, increasing investor awareness and introduction of more products by mutual funds favour SIP flows to continue.
On the other hand, retail investors are participating directly in the markets with the share of retail volumes rising from >40% on an average long term to about 65% on an average post the pandemic.
Q) What are your expectations from the June quarter earnings season?
A) Our estimates suggest Nifty PAT could register 62.3% YoY growth during the June 2021 quarter, largely due to low base effects of Q1FY21. On a sequential basis, we expect Nifty earnings to remain largely flat.
Meaningful growth in earnings sequentially is expected from Telecom and Discretionary, while Industrials and Financials could see a decline.
We expect Metals to continue delivering stellar performance YoY as well as sequentially and expand their profit margins.
Q) What according to you could pose as the biggest risk for Indian markets? Is it inflation resulting in rise in interest rates or earnings which may not be as rosy as what was estimated? Fitch also downgraded India GDP forecast to 10%
A) Currently, the biggest risk for Indian markets is the onset of a potential third Covid wave. Investors are currently anchored to expectations of continuing economic & earnings revival.
Inflation is a near-term risk but we see government efforts to address the supply-side driven issues favourably. As a result, inflation is likely to fall within the RBI range. Rising rates in India and globally continues to be a risk.
Q) Which sectors are looking attractive for the second half of 2021?
A) We prefer Financials, Industrials and Materials sectors to do well. For Financials, we believe post Q1FY22 focus could shift towards growth vs concerns on asset quality currently.
Most Financials have conservatively taken higher provisions already and are likely to make further provisions in 1QFY22 and are also well-capitalized.
We expect credit growth to accelerate and benefit the Financials sector. We believe India is at the start of a multi-year capex cycle. The Industrials sector would benefit as the capex cycle accelerates over time.
Materials stocks would continue to benefit from the capex cycle revival and the commodity price rally.
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