Sampath Reddy, chief investment officer at Bajaj Allianz Life Insurance, says earnings growth will support the stock market rally even amid challenges of liquidity withdrawal and interest rate headwinds next year as the economy has come out of the pandemic-led slowdown.
A strong corporate earnings trajectory is expected in FY22 and FY23, Reddy told Moneycontrol in an interview. Any decline in the stock market may not be too deep and should be used as an opportunity to buy, says Reddy, who has over 20 years of experience in investment management. Edited excerpts:
The Monetary Policy Committee will announce its interest rate decision today. What are your broad expectations and do you expect the Reserve Bank of India to take more steps to squeeze liquidity?
Overall, across the board, central bankers are taking steps to gradually unwind liquidity measures introduced during the pandemic. The US Federal Reserve started tapering from November and of late has said that there is a need to increase the pace of tapering. In India, we expect the RBI to keep rates unchanged… and maintain its accommodative stance. The RBI will continue to calibrate its steps to normalise excess liquidity in the banking system. However, we expect that it will keep the policy tone balanced at this juncture, given the inflation and growth dynamics. Presently, we prefer the medium-term part of the yield curve given the steepness of the curve.
The RBI may start by reducing the corridor between the repo and the reverse repo rate (by increasing the reverse repo rate) in early CY2022, followed by 1-2 repo rate hikes later during the calendar year—given the evolving inflation trajectory.
What is your reading on Q2 GDP announced on November 30? Have you changed your full year estimates for GDP?
GDP growth for Q2 came in along expectations at 8.4 percent year-on-year and in absolute terms, the level is now slightly above pre-pandemic levels. Private consumption expenditure, which has the highest weight in GDP (about 55 percent) grew slightly below expectations at 8.6 percent YoY during the quarter. For the last three months, trade data indicates a pickup in domestic demand led by strong import consumption. Gross fixed capital formation (investments) grew by a strong 11 percent YoY in Q2 and government expenditure also supported by growing at 8.7 percent… compared to a contraction in the previous quarter.
We continue to believe that India’s GDP would grow at about 9.5 percent, which is similar to the RBI’s forecast for the full fiscal year. There is some uncertainty with recent news of the Omicron variant of the Covid-19 virus, but it is still a developing situation and we do not see a major impact of that on growth forecast at the moment.
Do you think it is the right time to bet on the auto sector, especially after looking at monthly sales for November?
The auto sector is yet to come to the pre-Covid levels of sales partly due to constraints on the supply side (semiconductor chip shortage) and partly due to lower demand in the mid- to entry-level segments. Also, the sector is facing headwinds from margin pressure due to a rise in commodity prices such as steel, aluminium, rubber and plastics.
However, the electric vehicle segment is seeing healthy traction and strong growth in demand. This poses a threat to traditional auto OEMs (original equipment manufacturers) and we prefer to look for good opportunities in the EV space… If the economic growth recovery continues to gain traction, then the auto sector should also benefit from that.
What are the big events to watch out for in 2022? Will these events hit market sentiment?
Some of the events to watch out for in 2022 are the Fed and European Central Bank’s monetary policy stance and subsequent impact on liquidity and yields. The other factors to watch out for are the trajectory of crude oil and commodity prices and corporate earnings recovery. Last but not the least are the risks from restrictions/lockdowns placed again due to the new Omicron Covid variant.
The US Fed has already announced tapering of its monetary policy and recently the Fed chairman commented that it may increase the pace of taper going forward. The US Fed is forecasting one rate hike later in CY22 as per its September 2021 meeting projection, but presently Fed Fund futures indicate that market participants expect 2-3 rate hikes in CY22. An increased pace in policy normalisation by major global central banks, given the inflation trajectory, may lead to some market volatility in the interim.
Corporate earnings have surprised on the upside amid the pandemic and we expect a strong corporate earnings trajectory in FY22 and FY23 as well, which should help to support the current elevated market valuations. Therefore, we believe that any market correction may not be too deep and should be used as a buy on dips opportunity by the investor (as per their individual risk profile).
Do you expect the market to return to its record high levels before the Union Budget?
Yes, the market would make a new high but it is difficult to say whether it would happen before the budget or not. Even though the market faces challenges of liquidity withdrawal and interest rate headwinds during the next year, as the economy has come out of the Covid-led slowdown, we believe the earnings growth would support the rally in the market.
The Q2 corporate earnings in India have been in line with expectations, despite the impact of higher input costs on operating margins. Earnings have been primarily helped by commodity sectors (like metal and oil & gas). The overall demand scenario seems to be improving, as also indicated by a strong festive season, and the earnings trajectory for the remainder of FY22 and FY23 remains quite healthy, with the expected economic recovery.
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