After witnessing around 20 percent returns on the benchmark indices so far in 2021, Gautam Duggad, Head of Research – Institutional Equities, at Motilal Oswal Financial Services, told Moneycontrol that it may be difficult to see similar market returns in 2022 as earnings catch up with valuations.
Further, he believes that largecaps now offer relatively better valuation comfort as midcap and smallcap indices are trading almost at par with the Nifty.
On Budget 2022, Duggad says the government has been announcing several initiatives and reforms even outside the budget, and to that extent, the relevance of the budget for big-bang announcements is limited. But, “given the five State elections scheduled in March-April 2022, some populist measures targeting specific States could be expected,” he says.
Edited excerpts:
The market has given a 20 percent return in the current year. Do you expect similar returns in 2022 given the rising expectations for better economic and earnings growth?
Markets have returned around 20 percent year-to-date (YTD) CY21. While it is always difficult to forecast returns, in 2022 we expect markets to remain positive on the back of strong corporate earnings delivery. The earnings estimates for FY22 and FY23 have not seen any downgrades in the past 6-9 months and we expect 35 percent and 19 percent earnings growth for the Nifty for FY22 and FY23.
Of course, some of this is in the price and therefore justifying a similar quantum of returns may be a bit difficult as earnings catch up with valuations.
The Union Budget, a much-awaited event, will be presented on February 1. What are your broad expectations from the FY23 Union Budget?
After last year’s excellent budget, we expect the policy momentum to continue. We also note that the government has been announcing several initiatives/reforms even outside the budget, and to that extent, the relevance of the budget for big-bang announcements is limited.
Markets will keep an eye on the disinvestment/asset monetisation agenda and more details around it. The budget, in our view, will continue the twin approaches of fiscal discipline and calibrated spending to revive growth. Given the five State elections scheduled in March/April 2022, some populist measures targeting specific States could also be expected.
Do you expect a further corporate earnings upgrade in the coming quarters, and if so, why? Which are the sectors that will drive an upgrade in the Nifty EPS in 2022?
While earnings expectations continue to remain elevated with FY22 EPS growth estimated at 35 percent YoY and FY23 EPS growth at 19 percent YoY, we don’t expect any material upgrades ahead given the prevailing input cost backdrop and supply concerns in some sectors like Auto.
If the current estimates of 35 percent and 19 percent growth in FY22 and FY23 are met, that itself will signal the beginning of a good corporate earnings cycle.
We expect the Banking and NBFC sectors to do well in FY23 as well. Earnings for banks in the past 4-6 quarters have been strong, on the back of asset quality normalisation. Any pick-up in credit growth would further spur bank earnings. IT is likely to post strong earnings growth led by a multi-year tech cycle. The areas where earnings can surprise are Metals, if commodity prices sustain at current levels.
The broader markets — Nifty Midcap 100 and Smallcap 100 indices — have rallied more than 45 percent and 55 percent, respectively, so far in 2021. Do you expect such an outperformance (compared to benchmarks) to continue in 2022 as well?
We believe that such an outperformance is unlikely to continue in 2022. The outperformance in the Nifty Midcap and Smallcap 100 indices was partly due to a severe underperformance from December 2017 levels, and more importantly, due to a broad-based earnings recovery.
While we expect midcaps and smallcaps to perform well, the outperformance over the Nifty is unlikely to sustain as rising external risks (Fed tapering, interest rates rising, commodity price rise) and volatility may drive preferences towards the largecap basket. Moreover, largecaps now offer relatively better valuation comfort in our view as mid/smallcap indices are trading almost at par with the Nifty.
What are the key events to watch out for (domestic as well as global) in 2022?
The key events to watch out for in 2022 would be the upcoming elections in five States. Globally, we need to watch out for Fed meetings for rate movements. China’s policy response to the economic slowdown post the Winter Olympics would be another key trigger for the markets. And of course, given the pandemic, any emergence of further waves of Covid-19 will keep the market nervous.
What are the risks (global and domestic) and concerns that can spoil the market momentum in 2022? Do you think FII outflows are a major concern for India in the current environment?
The key risks for the markets are the US Fed tightening, the contagion from China’s real estate crisis, State elections and the RBI monetary policy response to the US raising interest rates. The current FII outflow — since October 2021 — has impacted markets in the short term but domestic flows (with annual SIP flows crossing Rs 1 trillion for the first time in a calendar year) have acted as a good counterbalancing force.
We believe that the current forex reserves of around $ 630 billion+ provide a sufficient cushion to manage any macroeconomic volatility.
Have you spotted any themes that investors have to add in their portfolio for strong returns?
Prevalent strong themes like formalisation of the economy, a shift from unorganised to organised trade across sectors, and financialisation of savings are very strong multi-year themes in our view. They offer very secular and attractive multi-year compounding returns. Sectors like Jewellery, QSR, BFSI, Durables, Consumer discretionaries and Non-lending Financials are expected to benefit from these themes.
The Covid pandemic has accelerated the Digital transformation journey for corporates across the world. We expect Indian IT to continue to benefit as a multi-year tech cycle unfolds. Apart from these, the real estate cycle is reviving after almost a decade and offers an interesting play with many second-order beneficiaries given the multiplier effect of real estate recovery.
What is your economic growth estimate for 2022 and what are the risk factors that can moderate/drive economic growth momentum in 2022?
We estimate FY22 and FY23 GDP growth of 9.1 percent and 6.3 percent, respectively. The key risks that can moderate economic growth in 2022 are a) any new Covid-9 wave, which could potentially lead to imposition of restrictions b) a below-normal monsoon and c) rising commodity prices leading to higher inflation.
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