Abhay Agarwal is the Founder and Fund Manager at Piper Serica.
If Ukraine war situation resolves over next couple of months, we can expect a big inflow of FPI funds into all emerging markets including India, Abhay Agarwal, Founder and Fund Manager at Piper Serica said in an interview to Moneycontrol.
With an expected growth of 15 percent in corporate earnings, and assuming no geopolitical risk, one can expect the Indian market to provide a 15-20 percent return in FY23, says Agarwal, who has about three decades of experience in the stock market.
The risks to this forecast are a sharper than expected inflation and rate hikes by global banks including the RBI, Agarwal feels. Edited excerpts:
How do you read the FY22 that ends next week with around 20 percent gains despite volatility and nervousness seen during the second half of the financial year?
A lot of credit needs to be given to domestic long-term investors who have stuck to their asset allocation plan and have continued to not only hold their investment position but have also added to them. Mutual fund flows have stayed positive throughout the year. It shows that the Indian investors have matured considerably and are not scared by volatility. This is the reason that almost $ 36 billion of selling by FPIs in the last 4 months has been absorbed without crashing the market.
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Investors are looking beyond near-term concerns and are eying long-term investment opportunities that are in line with the growth of the Indian economy in this decade. Even now the share of equity in savings is less than 5 percent compared to 50 percent in real estate. So, there is still considerable room for domestic flows to improve as the investor profiles become younger.
What could be the market trend in the near to medium term? Also, can the market give similar returns (like FY22) in FY23 as well?
Global funds have increased their cash holdings to 5.9 percent from 5 percent over the last 3 months. This is the highest level over the last 3 years. Their big worry is the Ukraine war situation. If this situation resolves over next couple of months, we can expect a big inflow of FPI funds into all emerging markets including India.
The Indian markets have always traded at a premium but with the recent correction, the valuations have become more reasonable. We believe that India will get a higher share of allocations this time because of geopolitical reasons also. With an expected growth of 15 percent in corporate earnings, and assuming no geopolitical risk, we can expect the Indian market to provide a 15-20 percent return in FY23. The risks to this forecast are a sharper than expected inflation and rate hikes by global banks including the RBI.
What are the challenges for the market in the coming financial year?
Inflation will be the biggest challenge. Post COVID the whole world is opening up rapidly. Economic activity has significantly picked up. However, supplies are not able to keep pace because of underinvestment over the last two years. As a result, basic commodities like crude, base metals, and Agri products are seeing an extended peak cycle. Companies are not able to pass on these sharp increases in input prices to customers immediately. This will put a lot of pressure on the profitability of even large companies despite robust growth in the top line.
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If the inflation proves to be sticky, then all central banks, including RBI will have to raise rates sharply which will negatively impact nascent demand growth in discretionary items like real estate, autos, and travel. Investors are hoping that the inflation is transitory and will fall as supply chains get fixed.
Do you think the US, which is currently facing a stagflation issue, could get into recession mode? Has the market priced in this risk?
It is doubtful that a vibrant economy like the US will get into a recession. It has a very large share of intellectual property in its GDP and its companies are now global behemoths. So unless the Fed is forced to hike rates to well over 6 percent in a very short span of time, it is extremely unlikely that the US will get into a recession. The markets perceive it as a risk but no one is pricing it in their models yet. The Fed is cognizant of the fact that it needs to protect the growth post-COVID and will err on the side of growth when faced with that choice.
CLSA has a sell call on Maruti Suzuki and Tata Motors. Do you think the worst has already been priced in by auto space or the more fall is likely to be seen ahead?
Auto companies are in a double whammy right now. Commodity price increases are hurting the margins and now with the sharp hike in crude oil, the demand for larger vehicles is expected to be muted. The European market is slow for Tata Motors because of the Ukraine situation. In addition, the government is regularly tightening the safety requirements including an increased number of safety bags which further pushes up the cost.
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The much-promised scrappage policy is nowhere in sight. Insurance rates are also expected to go up soon. With ride-sharing companies making a comeback post-COVID, the demand for four-wheelers is expected to stay muted in the near term. We are not expecting the auto companies to outperform over the next year.
As we soon enter into FY23, what are the sectors investors should buy and hold, and what are the sectors they should stay away from?
We are positive on travel and entertainment, consumer tech, EMS, and health care space. We are negative on large private banks because they are seeing a lot of competition from PSU banks for the corporate business and the fintech companies for the retail business. We are also negative on large generic pharma exporters because they will continue to see product price erosion and margin compression.
Also, the FDA (Food and Drug Administration) is expected to increase its physical inspections post-COVID. Lastly, we believe that large FMCG companies will see slower growth and lower margins because of a sharp increase in raw material prices. We expect that their valuation multiples will fall as they stop getting priced as growth stories.
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