After scaling record highs in October, the Indian equity market has moved into a correction phase that may last for a couple of more months until the next leg of rally kicks off, says Shailendra Kumar, Chief Investment Officer at Narnolia Financial Advisors.
Known in the financial services sector for his deep insight earned in over two decades of fund management and investment advisory, Kumar is worried about the inflationary trends.
The key negative for the market in 2022, he shares in an interview with Moneycontrol, would be a sustained level of high inflation as it would harden the interest rates, driving market valuations down. Excerpts from the interview:
Do you expect the market to hit record high levels before Union Budget?
The price structure shows some signs of fatigue. Most of the previous bull phases like those of 2002-08 and 2013-2018 had six-seven major corrections to the tune of 10-20 percent. So, even during a strong bull market, price corrections are highly normal.
In that context, the current bull market that started during the middle of 2020 had been unique in the sense that there had been no major correction yet, while the Nifty gave more than 100 percent returns. In that sense, after hitting a record high in October, the market has started a correction that may last for a couple of more months and then the next leg of the rally will start.
How do you see the impact of Omicron issue on the market sentiment?
My understanding is that even in countries where Omicron has turned out to be a major issue have not seen huge economic disruption. So, as of now, my sense is the economic damage due to any new variant of the virus would be limited. Market reactions would be restrained and certainly not be prolonged.
Do you think one should now go bullish on sectors like metals, auto, bank, energy, financial service, and pharma that declined the most?
The recent decline in metal stocks was largely because of a sharp correction in global metal prices. If the global metal prices stabilise around current levels, then it will mean good cashflow growth for metal companies and there could be a further rally in metal stock prices.
But we have a more structural and optimistic outlook for banking stocks. The banking sector has overcome the asset quality problems, higher digital adoption implies better cost structure with scale. Now, as capacity utilisation increases in India Inc, the sector would see growth in lending in the next 6-12 months.
How do you see the RBI stance on maintaining status quo on rates?
The RBI is doing a smart balancing act of keeping the rates low while reducing the system liquidity at the short end. Also, the debt market in terms of its term structure appears to be stabilising. While 10-year has stabilised around 6.3-6.4 percent, the call rate has seen hardening, reducing the term premium, which was at a multi-year high till a quarter back.
Continuing with the ‘accommodative’ outlook makes the RBI’s current monetary stance contrarian to other global central banks and that could be tested as we enter 2022. We have witnessed inflationary pressure due to rise in energy and other commodity prices in 2021. If that repeats in 2022, then surely we are set for a tighter monetary policy going ahead. Either way, the gap between repo and reverse repo will be reduced going forward.
What are the key events that you think will affect the market next year?
Medium-term movement of the market depends on earnings growth and the discount factor or underlying interest rate. While short-term movement depends on flows and events. Structurally, we remain very positive about earnings growth for the next few years.
The key negative for the market for 2022 would be a sustained level of high inflation as that would mean hardening of interest rate and that would require market valuations to come down. In terms of key positives, there would be the LIC public issue, bank privatisation, and Indian bonds becoming part of global indices.
Do you expect the flood of IPOs to continue in 2022 as well, after record fund-raising and more than 55 companies going public this year?
We have seen many good businesses getting listed during 2021. And it looks set to repeat in 2022 as well. It is encouraging to see well-run good businesses being listed. Going forward as the economy is getting more and more digital, many consumer tech companies with strong growth ahead would be getting listed.
Also, some old economy companies generating strong positive cashflows are coming to the market. Though one must judge each of these IPOs on their individual merit before investing and that is more important as valuations offered are usually high.
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