Oil prices crossed a seven-year high on Monday amid the Ukraine-Russia stand-off. Shibani Sircar Kurian, Senior EVP & Head, Equity Research, at Kotak Mahindra Asset Management Company, told Moneycontrol that sustained high crude oil prices could have an impact on inflation and interest rates. However, “the RBI is currently projecting that inflation in India is likely to moderate in H2FY23, closer to its medium-term target, which provides room to the Central bank to keep monetary policy accommodative,” she says.
With earnings outcomes so far being by and large in line with expectations, “we do not envisage any sharp revision in Nifty earnings estimates for FY22 and FY23 currently. However, the trend of earnings upgrades seen in the last few quarters appears to be petering out,” said Kurian, who has close to 17 years of experience in the Indian equity markets.
The market corrected more than 4 percent in two straight sessions. Do you expect the market to correct another 10 odd percent from here on?
While there could be some volatility or consolidation in the near term given valuations and global risks, the trajectory of corporate earnings in FY23 is expected to remain strong. This would likely provide support to equity markets.
Some of the key events to watch out for include the upcoming State elections, trends in vaccination, monetary policy outcomes both in India and globally, geopolitical risks and their impact on crude oil prices, and the corporate earnings growth trajectory.
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Oil prices crossed a seven-year high amid supply concerns. Is this a temporary risk for equity markets?
Geopolitical issues and supply-side pressures have resulted in crude breaking $ 90 a barrel and creating some macro-economic uncertainty. While India’s macro parameters are impacted by higher crude oil prices, the external balance sheet of the country this time around appears much stronger than was the case during the taper tantrum of 2013.
Further, the RBI’s forex reserves, at over $ 630 billion, provide further ammunition to the Central bank to curb volatility in the currency markets.
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Sustained high crude oil prices could have an impact on inflation and interest rates. However, we must note that the RBI is currently projecting that inflation in India to likely moderate in H2FY23 closer to its medium-term target, which provides room to the Central bank to keep monetary policy accommodative.
The corporate earnings season is over. Was the season in line with your expectations and have you revised your Nifty EPS estimates downwards after the results?
So far, at a headline level, corporate earnings in Q3FY22 have been largely in line with expectations. While topline growth has been strong, higher input cost pressure and the lag in terms of price hikes has resulted in margin pressure across most sectors. Forty-four Nifty companies have reported numbers as we write this, with sales growth of around 29 percent YoY, EBITDA growth of around 12 percent YoY and PAT growth of around 18.2 percent YoY.
Going ahead, it is likely that some of the margin pressures seen in the current quarter could have been partly eased by price hikes across several segments. However, we still need to watch out for the impact of these price hikes on demand growth and also the trajectory of input costs over Q4FY22.
With the earnings outcomes so far by and large in line with expectations, we do not envisage any sharp revision to Nifty earnings estimates for FY22 and FY23 currently. However the trend of earnings upgrades seen in the last few quarters appears to be petering out.
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With the sharp correction in markets, have you spotted any themes that investors can start adding to their portfolio?
The Union Budget this year was out-and-out a pro-growth budget with the Government’s key macro focus being infrastructure growth and boosting capex spend in a bid to sustain investment growth momentum. The highlight of the budget this year is that it sets the foundation for structural growth over the next few years via investment. Capital expenditure is budgeted to rise by over 24 percent over FY22RE with a focus on roads, railways, defence and housing. This is positive for sectors such as infrastructure, manufacturing, industrials and cement
.
Other than the capex-related theme, some of the other key themes that we are positive on currently are: a) Improvement in household capex and revival of real estate growth
- b) Financialisation of savings and the continued shift in market share towards large private sector banks c) Export opportunities and the China + 1 strategy d) Digital adoption, a long term structural trend
Will the RBI maintain its accommodative stance in the upcoming policy meeting, too?
The RBI has maintained the status quo with no change in policy rates and the stance was maintained as accommodative. The tone of the policy overall was dovish with the RBI projecting that inflation would likely move closer to the medium term target of 4 percent in H2FY23. The RBI states that while consumer price inflation has edged higher, it has remained largely along anticipated lines. According to the RBI, headline inflation is expected to peak in Q4FY22 and it projects that CPI inflation would moderate in FY23 to 4.5 percent, which is lower than consensus estimates. This provides room to the Central bank to remain accommodative.
While the consensus was not baking in a policy rate hike, the tone of the policy was more dovish than the market was expecting, resulting in 10-year G-Sec yields declining post the announcement of the policy. The Central bank continues on the path of liquidity normalisation in a gradual manner. Liquidity management may therefore remain the focal point for the RBI with the 14-day variable reverse repo and repo being the key liquidity management tools.
The status quo on policy rates along with the continued accommodative stance to support economic growth and moderate inflation expectations should help ease some of the pressure on G-Sec yields. While the higher-than-expected borrowing programme announced in the Union Budget resulted in a rise in G-sec yields post the budget, it is likely that some of the growth and revenue projections made in the budget are conservative and these could have an upside bias resulting in some positive impact on the projected levels of the fiscal deficit in FY23BE.
Globally there has been a change in policy stance by a few Central banks and a rise in the inflation trajectory and elevated commodity prices. However, we expect that RBI will adopt a wait-and-watch approach for now, especially as it expects domestic inflation to moderate in H2FY23. Higher commodity prices and their impact on inflation remain key risks.
What strategy should investors follow now, considering there is a lot of volatility in the market?
India appears to be in a structural uptrend with a likely new profit cycle, improvement in capex trends and a supportive policy environment. However, in the near term, we expect that there are a few challenges that could lead to near-term volatility or consolidation in the market. We have seen volatility in global markets, too, and this could have a rub-off in domestic markets as well. Further, the pace of earnings upgrades have slowed down and valuations are elevated, both absolute and relative.
We therefore believe that this is a stock pickers’ market and bottom-up portfolio building is our strategy. Over the medium-long-term, equity remains one of the best plays in terms of asset classes. Investors should stick to their disciplined approach to investing, keeping in mind their financial goals, risk appetite and asset allocation strategy. SIPs (Systematic Investment Plans) continue to be one of the best tools for long-term wealth creation.
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