Shyamsunder Bhat is the CIO of Exide Industries
Shyamsunder Bhat, CIO at Exide Life Insurance feels the present market valuations are building in a strong earnings growth in the current as well as the next financial year. “Any disappointments on that front could pose a risk.”
After 24 percent return on the Nifty50, “the possibility of double-digit returns from largecap equity indices in 2022 does exist,” says Shyamsunder Bhat, an electrical engineer and post graduate (in management) who has an overall experience of over 27 years in fund management.
“The impending liquidity tightening and eventual rate hikes are factors which are now reasonably known, the risks from Omicron (or subsequent variants) could be limited given the higher levels of vaccination and preparedness of nations. Hence, consumer sentiment and growth may therefore not be as impacted as earlier,” he said in an interaction with Moneycontrol. Edited excerpts:
Will India continue to enjoy premium to most of emerging markets in 2022 and why?
India’s stable macro factors including a favourable current account position, political stability, strong GDP growth in absolute terms as well as relative to most other large economies (even post the recent moderation of expectations, still expected to be close to double-digits) and a strong earnings growth expectation over the next two years, has contributed to flows from all segments of investors: FIIs, domestic institutions, and a significant direct participation by retail and HNI investors. This has resulted in the premium to other emerging markets rising to 70 percent, as compared to an average of 40 percent in the past.
India would continue to enjoy a premium to emerging markets in 2022 as well, even though it may not be to the extent of 70 percent. All the macro factors mentioned above, are likely to hold good in 2022 as well. Post the recent correction of 10 percent from the peaks (though there has been a subsequent recovery in the last few days), some of the individual stocks are appearing attractive from a valuation perspective.
After recent correction, have you spotted any themes that one may consider for investing in the current free-fall, for 2022, and why?
This was a long overdue correction which we have witnessed recently, though we have already seen some recovery in stock-prices post that. We could see the present relative laggards, like pharmaceuticals and automobiles sectors doing well over the next couple of years. Another sector which has been an underperformer has been a large sector like financials, partly due to selling from FIIs and partly due to concerns in some segments of the sector from emerging fintech companies. While near-term triggers may not be visible, this definitely appears to be a sector for 2022.
Some of the companies from the infrastructure/industrials space could also do well, as there is likely to be an increased government spend as well as possibly the first signs of a larger corporate capex than witnessed over the past few years. Cement is another sector that could do well, due to the above, as well as due to the uptrend in the real-estate sector.
Is there any possibility of double digit returns in 2022 in comparison with 2021 (up 24 percent)?
The impending liquidity tightening and eventual rate hikes are factors which are now reasonably known and therefore possibly factored in, during the recent correction. At this juncture, the risks from Omicron (or subsequent variants) could be limited (relative to the first 2 waves) given the higher levels of vaccination and preparedness of nations. Consumer sentiment and growth may therefore not be as impacted as earlier.
While the possibility of double-digit returns from equity largecap indices in 2022 does exist, we cannot really predict target levels for indices. Our investment philosophy is stock-specific, and particularly as insurers, our investment outlook is longer-term. We have a positive long-term outlook on our equity market, and post the long-overdue correction which has been witnessed over the past two months, several individual stocks are now at levels which could offer a reasonable upside.
How do you sum up the year 2021 in terms of events that supported/dragged the Indian equities? And what are the major events to watch out for in the coming year 2022?
2021 has been a year which commenced with a positive Union Budget in which the government indicated a glide-path for fiscal deficit which was gradual (slower) than in the past, implying that it is willing to borrow more if required to fuel growth, rather than increasing taxes. While we had the positive news of various vaccines being commercialized to combat the Covid pandemic with the vaccination drive launched in India in January, we soon had the second wave of the Covid pandemic in April and another round of lockdowns in various States. 2021 was also a year in which we witnessed excess liquidity in global economies resulting in equity markets and commodities spiking; and an earlier-than-expected recovery also adding to the rise in crude oil to a multi-year high.
Incentives for large-scale manufacturing in key sectors (PLI schemes), a relief package for the telecom sector (which should also bring relief to some of the banks!), formalization of the “bad bank”, divestment of Air India are some highlights of 2021.
India’s record vaccination drive was another landmark. We are on track for a GDP growth which could be almost in double digits this year. India’s forex reserves are close to their all-time highs, and therefore there is limited vulnerability to external funding risk.
For calendar 21-22, inflation trends, liquidity and earnings growth are 3 events which need to be watch out for: a resolution of the supply bottlenecks, normalization of liquidity, and earnings growth living up to expectations. In particular, as present market valuations are building in a strong earnings growth in the current as well as the next financial year, disappointments on that front could pose a risk.
Now less than a month left for the Union Budget presentation. Do you think it would be a big bang budget and what would be focus areas? Also is there any populist measures given the states elections going ahead?
The GDP growth figure projected for FY 22-23 and the projected fiscal deficit would be two announcements which will be keenly watched for, in the forthcoming Budget, apart from the disinvestment programme which has lagged in the present year. This is because focus is likely to shift towards fiscal policy, as monetary policy has already played its role since the beginning of the pandemic last year.
An infrastructure push, therefore, could be one of the central themes of the Budget. Even in the current financial year, the fiscal deficit is trending lower than the projected figure of 6.8 percent (due to larger than expected tax revenues) and therefore the government has fiscal space to spend aggressively in the last couple of months of this financial year.
With some uncertainty creeping in due to the Omicron virus as well as with important State elections ahead, it is unlikely that there would be any increase in tax-rates, and there could be some concessions in taxation in the lower income group.
Though the expected GDP growth for next year is likely to be slightly lesser, at an expected 8 percent+ versus the likely 9.5 percent+ of the current year, it is nevertheless likely to be among the highest in large economies.
Given the rising expectations for three rate hikes in the US in 2022 and liquidity tightening to control inflation, do you expect the RBI to think of rate hike in second half of 2022 or will the RBI continue to prioritise growth?
RBI is likely to continue to prioritise growth in the first half of calendar 2022, but could gradually normalise the monetary policy. If there are no negative surprises on the inflation front, we could see a rate hike in the second half of calendar 2022.
What are the great lessons you learned from 2021. On that experience, what is your advice to new age investors for 2022?
One of the lessons learned from 2021 are the adaptability and response of individuals, corporates, central banks and Governments, to unexpected events. While individuals adapted to a new way of working, corporates cut costs (some of which could be permanent), central banks ensured enough liquidity in the system and Governments took tough measures when required. From the perspective of equity markets, the importance of liquidity and earnings growth was reinforced, and we have also seen a glimpse of the untapped potential of retail domestic money in the Indian equity market.
As a general principle, investors should keep their age, income and risk appetite in perspective, along with their time horizon for investments.
At the age of 25-30 with a balance of Rs 10 lakh, where should one invest in 2022 or how should one allot money in his/her portfolio at the start of 2022 to get healthy returns?
The ability to have a higher allocation to risk-assets like equities does exist at this young age of 25-30 years. However, they should have a longer term horizon for equities (ideally 5 years+), and therefore only that percentage of corpus which is unlikely to be required during this period, should be allocated towards equities. Active asset allocation funds are an option that investors can consider.
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