“The market is basically factoring in major parts of the perceived risk of rising inflation, interest rate hike and moderation in earnings growth. Many quality businesses are now available at a favourable risk reward, and long-term investors should capitalise on it,” Aishvarya Dadheech, fund manager at Ambit Asset Management, said in an interview to Moneycontrol.
On the earnings front, he expects the trend of margin contraction to continue for the next few quarters.
With China imposing lockdowns, supply chain issues are exacerbating and fuelling a further surge in commodities prices. “Overall, we see cuts in earnings growth of Nifty50 by at least 5-7 percent for FY23 on account of this factor alone,” said Dadheech. Edited excerpts:
Like other analysts, do you also think this is not a great year for the equity market?
Over the last two quarters, the market has witnessed healthy consolidation due to a fear of slowing growth, the ongoing geopolitical standoff and rising interest rates. This correction has removed the froth from the market, and valuations have reset at reasonable levels. Nevertheless, investors still need to be vigilant, because the uncertainty of the geopolitical standoff still looms large.
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Commodity prices are least likely to see a secular downturn because China’s lockdowns will continue to disrupt the global supply chain. Rising rates, slowing growth and higher inflation will keep global markets volatile in the coming months and India will not remain insulated.
However, investors should capitalise on this opportunity by investing in the market at lower levels in a calibrated fashion. The market is basically factoring in major parts of the perceived risk of rising inflation, interest rate hike and moderation in earnings growth. Many quality businesses are now available at a favourable risk-reward, and long-term investors should capitalise on it.
How do you read the corporate earnings announced so far? Is there any possibility of major earnings downgrades in the coming quarters due to global issues?
Q4FY22 is picking up pace, with sectors like IT and BFSI mostly having reported their results so far. Contrary to expectations, most of the companies have delivered inline results or slightly better than estimated, with a few exceptions. In other sectors, companies have reported strong revenue growth but elevated commodity prices have impacted the margins of these companies.
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We expect the trend of margin contraction to continue even in the next few quarters. With China imposing lockdowns, supply chain issues are exacerbating and fuelling a further surge in commodities prices. Overall, we see cuts in earnings growth of Nifty50 by at least 5-7 percent for FY23 on account of this factor alone.
Domestic institutional investors and retail investors have been supporting the market even as foreign institutional investors (FIIs) keep selling Indian equities. Do you think this scenario will continue in coming quarters considering current macro issues?
With the recent debacle in Russia followed by China’s tech crackdown, foreign investors got mindful about investing in developing markets. We believe that FII selling will possibly continue for the coming months. FIIs have been selling India due to relatively high valuation compared with other emerging markets. Another reason is that most overseas investors are getting redemption in emerging market funds, which is forcing them to sell where they are sitting on large profits.
Nevertheless, India continues to remain a good house in a bad neighbourhood. Not only is India better placed than others to withstand external shocks, but will be the fastest-growing stable emerging markets economy. It won’t be surprising to see this trend reversing in the later part of this calendar year when FIIs turn buyers, as the TINA (There Is No Alternative) factor plays out.
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The IT sector has been the biggest loser in the last two months. How do you approach the IT space now and is it the time to bet on these stocks?
When interest rates go up, the valuation of long-duration stocks with high growth de-rates. Technology has seen a massive de-rating in the US with Nasdaq down 11 percent in the last year. The Indian IT sector (trading at stretched valuations two months back) was no exception and, therefore, is witnessing consolidation too.
Having said that, we believe the tailwind of growth in the IT sector is very robust. The current digital drive will support growth for at least the next four to five years. Most of the companies are sitting on large deal wins and are doing unprecedented levels of hiring (TCS alone did 35,000 new hires in Q4FY22 whereas Infosys did net 22,000 new hires).
One reason for the slowdown is supply side issues, with a paucity of manpower. Rising wage cost to attract manpower is hitting the margins of Indian IT companies. We believe this phenomenon will normalise in the coming two to three quarters. Overall, it is an opportune time to invest in the IT sector with a three- to five-year timeframe.
Are we at the beginning of a property upcycle? If yes, then is it the time to bet on these stocks for multibagger returns though there are going to be rate hikes ahead?
Real estate is in good shape and will continue to do well in the coming years, in spite of the rate hike. Real estate normally does well after a good equity market run. To play this property upcycle thesis, investors should play the proxies on real estate rather than directly investing in real estate companies.
Building materials like paints, adhesives, tiles, laminates, ply and cement should do well. Companies with higher market share, strong balance sheets, high pricing power and deep distribution in the building material sector will massively benefit from this property upcycle. Investors should lookout for opportunities in those companies.
China is facing lockdown fears now due to rising Covid cases. Do you think Covid is still going to be a risk for the equity market?
We believe the risk of Covid is largely factored in by the market. Lockdown fears in China are impacting the global supply chain and hitting the smooth functioning of trade. It is creating an artificial ripple effect in commodities prices amid the backdrop of the Russia-Ukraine conflict. This will adversely impact commodity-dependent countries like India. However, we believe this is a short term risk and will not have long-term implications.
Is it the time to bet on the banking and financial space where several analysts say valuations are comfortable now?
The banking and financial sector which has been underperforming due to unprecedented selling by FIIs provides a good entry point. The momentum of the retail and corporate-led credit cycle picking up as the economy comes back to normalcy will be the key determinant. BFSI has reported decent results in the last two quarters.
Banks are overprovisioned and have adequate capital and liquidity, with decade-low slippage ratios. Despite these improving fundamentals, BFSI is trading at a lower valuation. The current BFSI valuations place this sector in a sweet spot for investors with a favourable risk reward.
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 taking any investment decisions.
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