With crude oil prices hitting the $ 95/barrel mark last Friday, their highest level since October 2014, Manish Kumar, Chief Investment Officer at ICICI Prudential Life Insurance Company, says things could become a bit volatile.
Kumar, a veteran with over 28 years’ experience in equity research, trading and fund management, says equity markets may be volatile with a downward bias if the market senses macro instability and uncertainty over the global and domestic growth cycle alongside the prevailing high valuations and slowing earnings growth.
Edited excerpts from an interaction with Moneycontrol follow:
We are towards the end of the December quarter earnings season. How do you read the quarterly earnings announced so far?
In the Q3-FY22 earnings so far, we have seen a wide divergence between sectors affected by rising raw material prices (Consumer Staples and Durables, Cement, Auto, and Metals) and those not directly impacted by rising prices (Banks, NBFCs, and Technology). Most banks have reported an improvement in asset quality, led by controlled slippages and healthy recovery and upgrades. Most Tier-1 IT companies reported strong topline growth and a robust deal pipeline driving strong sales growth. Inflation has impacted volumes in Consumer Durables, Cement and Auto as well as Staples, while rising raw material prices have hit gross margins.
On the other hand, large-tier banks have come out relatively unscathed from the pandemic. Their provisioning coverage ratios remain above 70 percent while asset quality continues to trend better quarter-on-quarter. As corporate profits have improved in the last two years, companies have utilised the same to deleverage their balance sheets. They remain in a prime position to re-leverage as the economy strengthens further in FY23.
Do you expect faster consumption revival in the coming quarters?
The economic policy agenda from the government continues to prioritise supply-side action with the FY23 budget focusing more on roads, rail, defence and water. The government has even earmarked large soft-loan arrangements for States to undertake more capex. We see the government betting on two trends to lift business and consumer sentiment in 2022. First being the resumption of all parts of the economy (therefore jobs) due to vaccination and the second being the input price inflation easing on aggressive US Fed policy tightening.
On closer inspection, it may seem that the demand support from public spending could be insufficient, but the finance minister has created buffers by being conservative on FY22 and FY23 revenue assumptions, the surplus from which will most likely get allocated to capex or social sectors as the situation demands.
Also read – Correction likely if oil crosses $ 100;15-20% fall unlikely moving ahead, says Green Portfolio’s Divam Sharma
FIIs have been relentless sellers since October 2021, offloading shares worth Rs 1.52 lakh crore in the last four-and-a-half-months. Do you expect more outflows in the coming months given the expectations of faster Fed tightening?
The US Fed is expected to tighten monetary policy faster than earlier, which means we should be seeing at least three rate hikes this year. The US Fed is also expected to shrink its balance sheet in 2022. FII capital is likely to become more discerning due to the aggressive pace of monetary policy tightening by G3 Central banks. It is also a headwind for risk assets that have weak profit visibility. Market volatility due to Central bank tightening is likely to wane as we go through 2022, when it becomes clear that actions taken by central banks will contain inflation without making large sacrifices to growth.
What are the big themes on your radar for investment with a 1-2 year perspective?
From a near-term perspective, we maintain a cautious view on the market because of global liquidity concerns. For now, we will be looking at specific sectors that would benefit from Government policies and current economic conditions. Among the key themes would be ‘Capital Expenditure’-related stocks, which would see increased traction after the government’s focus on ‘Capital Expenditure’ in the budget. Another key theme to closely watch would be the manufacturing space, due to demand and supply normalisation and increased support by PLI schemes. To fuel this growth, credit flow should pick up and the major beneficiaries will be the banks. Lastly, IT should continue to do well on the back of increased spends on technology.
Also read – Q4FY22 will be a strong quarter, thanks to reopening of economy: Mohit Nigam of Hem
Oil prices have reached $ 95 a barrel. Do you expect more corrections in the equity market if oil crosses the psychological $ 100 a barrel in the near-term?
Sustained elevated oil prices are a risk for the market and have the potential to hamper an economic recovery. Higher crude oil prices pose a risk to faster global and domestic monetary and liquidity normalisation, which may impact growth. The consensus currently expects at least three rate hikes by the US Fed and a balance sheet contraction in Q3-CY22. Equity markets may be volatile with a downward bias if the market senses macro instability and uncertainty about the global and domestic growth cycle along with the current elevated valuations and slowing earnings growth.
Would you advise buying infrastructure, construction, capital goods, banks and realty stocks in the current correction?
India has witnessed elevated levels of spending by the government on infrastructure in the past few years. The recent budget is consistent with this intent, with a significant increase in allocation to centrally-driven capex plans. There are also other measures intended to encourage private sector capital expenditure — extension in the last date to be eligible for lower tax for new manufacturing plants and some import tariffs to encourage local manufacturing of capital goods. Taken together with measures of the last few years (corporate tax cut) and improved competitiveness of Indian manufacturing, we expect the private sector capex cycle to accelerate from here on. This would reflect in heightened credit growth, benefiting banks, higher demand for capital goods, as well as higher construction activity in general.
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