There’s no specific major risk looming on the horizon for the Indian equity space, but the hard-to-justify valuations of some big-ticket stocks and an unabated spurt in commodity prices may threaten the market dynamics going ahead, says VK Vijayakumar, the Chief Investment Strategist at Geojit Financial Services.
Since valuations are very high, some triggers can cause sharp corrections in markets globally, says Vijayakumar, a keen observer of financial markets, in an interview to Moneycontrol. Excerpts from the interaction:
What’s your reading from the earnings for the September quarter?
Broadly, results have been very good, indicating an upcycle in corporate earnings. The results for 44 Nifty companies declared so far shows net profit growth of above 19 percent YoY. This trend is likely to continue for Q3 and Q4.
What about the risks? Do you see any big risk hinted by the September quarter earnings season?
The September quarter results do not indicate any specific major risk. But there are general risks arising from rich valuations and in many cases excessively hard-to-justify valuations. Another concern arising recently is from the sharp rise in commodity prices. This spurt in input costs will impact the operating margins of many companies which are already under pressure.
Is it time for a portfolio recast? Which sectors/themes would you suggest for this?
When margins come under pressure, only businesses that can pass on the increasing costs to customers can retain profitability. Companies with popular established brands and those in dominant positions can easily pass on the increasing costs. Investors will do well to look at such themes and segments. We have recently seen segments like paints that have taken sharp price revisions.
Do you expect the market to consolidate now?
Market movements are likely to be determined more by global developments like spurt in inflation and a sooner-than-expected hike in rates by the Federal Reserve. Since valuations are very high, some triggers can cause sharp corrections in markets globally.
Do you think both the macros and micros are firing on all cylinders?
There are some concerns on the macro front like the high debt-to-GDP ratio that’s now at 90 percent, crude spikes that can be another headwind, and inflation that will rise in the coming months putting pressure on the RBI to depart from the accommodative monetary stance. But fiscal consolidation, low current account deficit and ample foreign exchange reserves are clear positives.
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