Mihir Vora, Senior Director and Chief Investment Officer at Max Life Insurance, expects that systematic investment plans (SIP) will continue to witness inflows unless there’s a sharp and sustained fall in the market.
He feels the economic recovery is certainly gaining traction but there are several cylinders yet to fire. “The services sector has not yet recovered fully – that is one big potential upside to growth. Consumer sentiment is above the pre-second wave levels, although still below the pre-COVID levels,” the veteran professional with experience across asset classes, including equity, fixed income and hybrid funds says in an interview with Moneycontrol. Excerpts from the interaction:
The SIP inflow remained strong above Rs 10,000 crore for the second consecutive month in October. Do you think this will continue in the coming months?
The low yields in fixed income, real estate and gold over the past years created a TINA (there is no alternative) factor in favour of equities. Equities have seen consistent inflow as real interest rates are negative and the employed middle-class has been largely unaffected by the COVID crisis. High investor returns on existing SIPs has added to the positive experience and has created further incremental flows to mutual funds in a virtuous cycle. We expect SIPs to continue to witness inflows unless there’s a sharp and sustained fall in the market.
What is your reading on the September quarter earnings? Have you seen more upgrades than downgrades?
For the second quarter this year, while the operating profit growth has been lower than expectations at 5 percent), revenue growth has been ahead of expectations by an equal percentage. Margins in sectors like autos and cement were suppressed due to higher raw material prices.
It has been a positive season and, in the last one month, consensus Nifty50 FY23 estimates have been upgraded 2 percent for revenues, 3 percent for operating profits (EBITDA) and 1.7 percent for net profits.
Do you see any big risk hinted by the September quarter earnings season? What about other risk factors for the investors?
One key risk is that the full margin impact due to higher raw material prices may not have been felt yet. There’s a possibility that the full impact may not have been passed on as many contractual price increases may kick in with a lag. Moreover, we also need to see the impact of product price hikes on demand i.e. whether consumers are price inelastic.
India has outperformed most emerging markets and hence relative valuations have become expensive. The other risk is inflation in the developed economies remains worryingly high – if it is perceived to be non-transitory then there is a risk of tightening by the central banks and a stronger dollar. Such a scenario is negative for flows to developing markets. Finally, COVID is rearing its head again in Europe and a few other developed economies.
Would you suggest some sectors or themes that one should consider for recasting the portfolio or continue with no change in the portfolio?
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The overall balance sheets of corporates, banks and NBFCs have improved in the past 18 months. Financials have spent time on protecting and improving the existing book and going ahead we expect them to restart the focus on growth. Asset quality over the near term should remain stable. Automobiles, especially the car segment, should pick up with easing of the chip shortage and latent demand.
Infra and capital goods companies are showing a good pick up in orders as (1) government spending on capex remains robust, and (2) many commodity companies have deleveraged massively and there is a good global demand leading to capex in this segment.
Real estate has seen a good pick-up in volumes after many years and there could be further upside in select stocks. Proxies to the infra and real estate sector such as cement or other building material companies will also benefit. Consumer staples may continue to see issues with rural demand and margin pressures. IT will remain solid but we may not increase exposure as the number of positive surprises have reduced.
Do you expect strong earnings growth in the banking sector from the third quarter onwards, considering the current credit growth trend and asset quality factor?
Yes, we expect earnings growth to accelerate in the banking sector. Credit costs are likely to drop to normalised levels in the absence of any third COVID wave. Debit bounce rates are already back to pre-COVID levels and recoveries should accelerate. Credit growth is likely to be led by housing finance and emerging greenshoots in private capital expenditure.
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Do you expect the market to consolidate before the Budget and the Uttar Pradesh polls?
We expect the global macros, retail flows/sentiment, commodity prices, inflation trends and earnings to be the primary drivers of the markets in the immediate future. Performance of some of the high-profile IPOs will also be important to drive sentiment. While Budget and elections are important and may impact the markets in case of unexpected outcomes, we don’t expect the markets to react prior to these events.
Do you think both macros and micros are firing on all cylinders?
The recovery is certainly gaining traction but there are several cylinders yet to fire. The services sector has not yet recovered fully – that is one big potential upside to growth. COVID has given thrust to formalisation of the economy – formal gaining market share at the cost of the informal sector. So the recovery in small businesses will be another cylinder to fire in the next few quarters. Non-farm employment remains below the pre-COVID levels. Consumer sentiment is above pre-second wave levels.
So, while we can say that there are many areas to improve, it also means that there are still many cylinders in the recovery engine yet to fire, which can keep the acceleration going.
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