Expect Union Budget 2022 to continue sops benefiting infra-related companies, says George Heber Joseph, CEO & Chief Investment Officer, at ITI Mutual Fund.
Consequently, sectors linked to the infra theme are the ones to bet on ahead of the Budget, says Joseph, who has 20 years’ experience in equity markets, consulting and capital markets.
In an interview with Moneycontrol, he said earnings growth acceleration is visible, going from a 6 percent CAGR trajectory in the last decade to 20 percent plus CAGR (YoY) in the last few quarters, suggesting that the market should ideally compound at 15-20 percent CAGR in the coming years.
Edited excerpts follow:
Earnings season will be kicked off by IT companies and HDFC Bank this week. Do you expect a significant earnings upgrade after the results?
Not really. Margins will still be under pressure for many sectors on a YoY basis because of the base effect and also the raw material price movement impact.
Which sectors will report double digit profit and revenue growth in Q3 on a year-on-year basis and which sectors will register negative profit growth on a year-on-year basis?
It will not be sector-specific but more stock-specific improvements that could be visible. The IT sector is in good shape and growth is visible but valuations are also stretched.
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We don’t expect a big earnings upgrade in many sectors. Stock specific, there could be upgrades in a few Large Banks and IT companies.
We do expect upgrades in Industrial Capital Goods/Engineering or Infra related companies in the large/mid and small cap space and we see the capex cycle is recovering after a decadal gap.
The Union Budget is the next key event to watch out for. What are the key focus areas and will it be a game changer?
We do expect the continuation of infra sops in this budget, which will mainly benefit infra related companies (Capital Goods, Engineering, Industrial Products, Construction and Real estate companies).
Which are the sectors to bet on ahead of Union Budget 2022 and why?
Clearly, sectors linked to the infra theme are the ones to bet on. Infra-related tax sops, land monetisation, reduction in government holdings in PSUs below 50 percent to help divestment etc could be some of the interesting points to watch for in the upcoming Budget.
Initial numbers released by banks generated confidence among market participants in the last few days. Is this the right time to add banking stocks in a portfolio or should one wait for actual Q3 earnings?
We do expect CY 2022 to again be a decent year for equities. Banking sector NPAs (non-performing assets) peaked in 2018 and started coming off. Because of Covid, SMEs/Retail NPAs could rise but corporate loans linked NPAs are coming off, which is good news for the large players in the sector.
We launched a banking sector fund at the fag end of the last financial year thinking that there is money to be made in the banking sector from a 3-year perspective, so we believe this is a good time to add exposure to banking sector funds.
The next six months could be a volatile period because of a lot of global news flows regarding tapering/rate hikes etc. Also, there is significant domestic news flow lined up (budget, state elections etc), so the best way to approach this is to allocate some long-term money by way of SIPs in equity oriented funds during this period.
Last week US 10-year bond yields spiked amid expectations of faster policy tightening and rate hikes in 2022. Do you think the US 10-year bond yields could cross the 2 percent mark soon?
Rates could move up as global inflation is coming back after a long time. Supply chain disruptions are visible in many sectors, which will lead to inflation spiking and therefore we have a bias towards global rates moving up.
Do you see the Nifty50 crossing the 20,000 mark in the first half of CY22, and if so, why?
The earnings cycle is reviving in India after a decade and therefore we do expect markets to be higher than they are today over the next year or so. Nifty companies that are large and very sound in nature are reporting a good increase in profits, which is a very positive sign.
Sectors that were not participating in the last 10 years — real estate, commodities, banks, and infrastructure-related sectors — have started contributing to Nifty50 index profits. Earnings growth acceleration is visible, going from a 6 percent CAGR trajectory in the last decade to 20 percent plus CAGR (YoY) in the last few quarters, suggesting that the market should ideally compound at 15-20 percent CAGR in the coming years. In this context, we believe the broad markets should also perform well. We are quite constructive on markets from a 3-year perspective.
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