India is still the fastest-growing economy, even after the perceived global slowdown, due to domestic demand resilience and India will report much faster earnings growth than most other markets, Aishvarya Dadheech, fund manager at Ambit Asset Management, said in an interview to Moneycontrol.
This time around, India is better prepared to absorb the risk of higher oil prices because of healthy forex reserves, low leverage, adequate liquidity, and a strong domestic economy.
Dadheech advises staying invested in businesses with strong pricing power and strong leadership positions. Edited excerpts:
After the more than 1,000-point rally from recent lows on the Nifty, has the risk related to geopolitical tensions and rising commodity prices been discounted?
The market has discounted a large part of the risk related to geopolitical tension, rising commodities prices and policy normalisation by central banks. This pullback turns out to be a healthy consolidation that took away the froth built up over the last year and a half. The market is providing decent opportunities now and long-term investors should capitalise on this.
The only risk factors to look out for are if the Russian-Ukraine war escalates with more countries getting involved and if global growth slows down materially compared to expectations.
Also read – US Fed delivers first rate hike after more than three years, raises interest rate by 0.25%
Do you still expect the market to post double-digit returns in the current year?
Easy moneymaking is behind us and market participants should rationalise their returns expectations. The market should be able to deliver returns close to an earnings growth trajectory, with limited upside from valuation multiple rerating. However, earnings growth is expected to see cuts due to rising inflationary trends and at best will grow in the 15-20 percent range next year. The market is trading at ~19x one-year forward earnings, which is almost in line with the long-term average.
What are the long-term implications of current geopolitical tension-led inflation concerns, supply worries, etc?
The current geopolitical standoff will have far-reaching implications on global trade and the economy. Commodity prices are less likely to see a secular downturn even after the war subsides as sanctions will continue to disrupt the global supply chain. This disruption will continue to fuel inflation in the coming years as supply chain normalisation will take more time than anticipated.
Also read – Russia-Ukraine war an opportunity for rupee’s internationalisation, says SBI’s Ghosh
The Indian manufacturing sector will possibly benefit from this, as the plus-one strategy (diverse sourcing) will get a boost.
Do you expect significant margin pressure in consumer-facing companies in the coming quarters?
Many consumer-facing businesses saw margin pressure in Q3 of FY22 and we expect this trend to continue for at least the ensuing two quarters. Investors should stay invested in those businesses with strong pricing power and strong leadership position in their respective segments.
These businesses will eventually gain out of this deadlock where they will be able to protect their margin turf and also benefit from gaining market share from unorganised players. The formalisation of the economy will further gain pace from here onwards.
Also read – Controlling inflation, reducing volatility key to stabilising rupee, economists say
Morgan Stanley recently raised concerns over stagflation and cut its FY23 growth forecast for India due to oil shocks and expects the current account deficit to widen to 3 percent of GDP. Are you in the same camp?
Stagflation is definitely the biggest risk now globally. India somehow is in a better situation. Even after the perceived global slowdown, India still is the fastest-growing economy due to domestic demand resilience. India will report much faster earnings growth than most other markets. Also, this time around, India is better prepared to absorb this risk of oil price increases courtesy of healthy forex reserves, low leverage (government and private), adequate liquidity, and strong domestic economy supported by both gross capital formation and financialisation of savings.
Overall, the current account deficit (CAD) may deteriorate if crude stays above $ 100 barrel for more than six months and it can lead to some currency depreciation, too, but we believe the Indian economy has enough ammunition to arrest the fall.
Are you bullish on large banks and financial shares after the recent decline?
Over the last year, BFSI (banking, financial services and insurance) has massively underperformed other sectors and indices due to uncertainty in economic recovery and unprecedented selling by FIIs in this sector. However, fundamentally, BFSI is witnessing remarkable improvement.
Over the last two quarters, credit growth is showing a clear sign of improvement, asset quality has improved, and most entities have strengthened their balance sheets, leading to a higher margin of safety.
Also read – After RBI green signal, HDFC Bank will take 2-3 quarters to regain credit card market share, says Parag Rao
Despite these improving fundamentals, BFSI (especially banks) are trading at lower valuation multiples compared to the historical average as the valuations have not been re-rated, as seen in other sectors. We find current BFSI valuations at comfortable levels, which place this sector in a sweet spot for investors with favourable risk rewards.
Is it a good time to rebuild portfolios with beaten-down quality names in the broader space?
We expect the broader market (midcap and small cap) will do relatively well as the economy shows strength and the unlock theme plays out. Investors should capitalise on this opportunity by investing in the broader market at lower levels in a calibrated fashion.
The market is basically factoring major parts of the perceived risk of rising inflation, interest rate hike, impending slowdown and moderation in earnings growth. Many quality businesses are now available at favourable risk-reward, and long-term investors should capitalise on it.
The only caveat here is that investors should invest in good and clean businesses (category leadership with high ROE), which have better visibility about growth/cashflows and have strong business cases.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before making any investment decisions.
