Rahul Bhuskute, CIO, Bharti AXA Life Insurance expects Nifty earnings to grow at over 20 percent earnings CAGR over the next two years.
“Even beyond that, economic growth outlook is strong which would keep on driving corporate profitability growth. Earnings delivery should help in maintaining valuations at elevated levels,” he said in an interview with Moneycontrol’s Sunil Shankar Matkar.
Bhuskute sees COVID as the biggest threat to economic recovery, however, he feels the impact would be limited due to better immunity among the populace. Edited excerpts:
Q: Currently the markets are near record high levels. Do you think the momentum will continue?
The equity markets have been rising sharply since the sharp correction of March 2020. The second wave of Covid-19 during April-May 2021 also did little to dampen market enthusiasm. The positive outlook is driven by a strong rebound in several lead macroeconomic indicators, robust improvement in corporate profitability and an expectation that, as the pace of vaccinations increases, the Covid-19 related fears will abate. Vaccination pace has increased to 5.2 million doses per day (average over the past 14 days). Total of 423 million Indians have got at least one dose while 121 million have taken two doses.
Nifty earnings is expected to grow at strong over 20 percent earnings CAGR over next two years. Even beyond that, economic growth outlook is strong which would keep on driving corporate profitability growth. Earnings delivery should help in maintaining valuations at elevated levels. Yield Gap (difference between bond and earnings yield) is at reasonable levels. Globally, central banks continue to remain focused on growth and have viewed rising inflation as transitory. The RBI also maintains its accommodative stance with inflation staying within its set tolerance bands. We would tread the markets cautiously, given the sharp run-up over the past year, but we remain positive about the upside in equities over the next one year. Stocks will do well in an environment of rising GDP, with commensurate increase in profitability.
Q: Which sectors can be added to the portfolio for let’s say a timeframe of one year?
Over next one year, we believe following themes should outperform – global recovery, digitalization, higher IT spending, domestic consumption demand pick up, higher spending on infrastructure and private capex, and China plus one strategy. Several lead indicators have turned positive in August, management commentaries were positive across quarterly calls. This augurs well for economic growth in FY22 and FY23. The manufacturing sector, for instance, is showing signs of a robust recovery. This will reflect in strong order books for capital goods companies and demand for credit from the banking sector.
Q: PM Modi said that the decision to repeal retrospective tax will lead to greater trust between the government and Indian industry. What is your view?
Any tax law should ideally not be applied retrospectively. In this regard, the Government’s recent step to repeal the retrospective tax will be viewed positively by the industry.
Q: What are the major reasons that led the sharp sell-off in midcap and smallcaps? Is it the additional surveillance measures introduced by the BSE?
Since the lows of the market in March 2020, the recovery in mid and small cap indices has been very sharp, reflecting the recovery in the macro economy and corporate profitability. Post 135 percent and 180 percent return in the two indices, market participants have taken some money off the table in select stocks, particularly in mid and small cap space. Bunching up of several IPOs also resulted in additional liquidity demand. The valuations are now at a premium to the largecap index, though this could likely sustain as the economy grows sustainably above 7 percent and corporate profitability reflects this steady macroeconomic growth.
Q: Benchmark indices more than doubled from March 2020 lows and broader markets are way ahead of them in terms of returns. Do you think it is the time to turn cautious?
Markets move in tandem with growth in corporate profits. We expect the pace of growth from corporate India to remain strong as mentioned earlier, and this should drive upside in the markets. The macroeconomic factors are also strong post two years of lacklustre growth. We would however remain cautious, and would focus on taking advantage of the meaningful volatility. The long term trend remains positive. The risks to our view include a potential Third Wave and subsequent waves, but we expect the impact of these to be limited due to better immunity among the populace.
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