Susmit Patodia, Director, Portfolio Manager, Motilal Oswal Asset Management Company, says the earnings season continues to be extremely strong.
Earnings have been an upgrade cycle for almost four quarters, which has not happened in the last 10 years, he says. In an interview to Moneycontrol’s Sunil Shankar Matkar, he says consumer and “financial discretionary” look the best sectors to be in. Edited excerpts:
Markets are near record highs. Do you think the momentum will continue? How will the market behave till the next Independence Day?
The markets are a function of earnings in the long term and liquidity in the near term. Move away from physical assets and low fixed-income rates is leading to significant flow into equities. There is no sign that this migration is going to change anytime soon. This is the short-term perspective.
Long-term earnings have been extremely strong as well. We have been in an upgrade cycle for nearly the last four quarters which has not happened in the last 10 years.
Which are the sectors that can boost the portfolio returns by the next Independence Day and why?
Consumer and financial discretionary look the best sectors to be in. The auto sector has gone through tough three years, starting from BS transition to now issues of semi-conductor. As the supply chain normalises and the economy stabilises, demand will come back too. This will make this sector interesting again.
Financial discretionary like insurance, asset management are sectors of the future. As we move on our journey to $ 5000 per capita GDP in this decade, discretionary over sustenance will be the mainstay.
Prime Minister Narendra Modi has said the decision to repeal the contentious retrospective tax will lead to greater trust between the government and the Indian industry. What will be the impact of the decision?
Every step by the government that reduces the number of times that corporates have to look over their shoulder is a positive. These steps have an effect like compounding. A 1,000 small steps lead to a huge change in ease of doing business while every step may seem insignificant.
What led to the sharp sell-off in midcap and smallcaps. Is it because of additional surveillance measures introduced by the BSE?
A selloff of 5 percent should not be construed as sharp. There is a certain risk premium that equities carry and the drawdowns are nothing but a manifestation of that risk premium. The surveillance measure actually is cautioning us of some unwarranted price action in some stocks as seen by the exchanges. It is better to have these small adjustments than letting the bubble become too big and its bursting causes a flood across the market.
The benchmark indices have more than doubled from March 2020 lows and broader markets are way ahead in terms of returns. Do you think it is time to turn cautious or the momentum will continue?
The earnings for the Nifty index in FY21 is higher by 15 percent than FY20, while markets are 30 percent higher. The divergence is not as high if we were to look at it from a point-to-point perspective. If you were to take the bottom of 2020, earnings this quarter are also up 70 percent YoY. Hence, whenever we make a point-to-point comparison, we need to be cognisant of earnings comparison as well.
After its recent policy meeting, do you think the RBI has started the process of sucking out excess liquidity?
We have surplus liquidity running into nearly $ 7 lakh crore. The issue now is not the supply of funds but the demand for credit. So a little bit of tinkering by the RBI is unlikely to have any impact.
What is your reading of the June quarter earnings? What did the earnings season and management commentary indicate about the next quarterly earnings and FY22?
The earnings season continues to be extremely strong. We have had nearly 70 percent YoY earnings growth in Q1 for the large-caps universe while over 80 percent for the mid and smallcap companies. The estimate for FY22 is at 35 percent growth and please remember this is over a 15 percent growth in FY21.
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