Sampath Reddy
Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life, believes the worst of selling by foreign institutional investors (FIIs), which has roiled sentiment, could be behind us.
There could be some turbulence in the near term but as India’s growth story remains intact, FIIs would continue to find the country an attractive investment destination, said Reddy who has decades of experience managing assets.
He, however, thinks that the days of positive earnings surprise are over. “We may see some moderation in corporate earnings growth due to margin pressure and rising interest rates,” he told Moneycontrol in an interview. Edited excerpts:
Is India entering into a stagflation-kind of environment now?
We won’t really use the term “stagflation” to describe the macro environment in India. Stagflation includes economic stagnation and mass unemployment, besides rising inflation, and we don’t see the first two conditions as relevant for the Indian economy.
India is projected to be among the fastest-growing major economies over the next few years in an environment of a global slowdown in economic growth.
Recently, in its June 2022 Global Economic Prospects report, the World Bank projected India’s GDP growth for FY23 and FY24 at 7.5 percent and 7.1 percent, respectively, which is quite a healthy growth rate despite some slowdown. The RBI has kept India’s GDP growth rate forecast for FY23 unchanged at 7.2 percent in its recent monetary policy review.
Inflation is seeing upside pressure in India due to elevated commodity prices and the RBI revised upwards its inflation target for FY23 to 6.7 percent versus 5.7 percent earlier, which seems quite realistic to us. However, it’s probably worth noting that a 7 percent inflation print in an emerging economy (like India), though elevated, is still manageable.
Comparatively, a similar or higher inflation print in a developed economy (like the US) is relatively much more elevated and at a multi-decade high. The long-term US inflation target by the Fed is around the 2 percent mark.
After Q4 earnings, do you think India beginning an earnings downgrade cycle?
In the last two years or so, Indian markets have benefited from a positive earnings surprise, which has helped it to outperform. Nifty earnings growth came in at around 18 percent in FY21 despite a GDP contraction of 6.6 percent due to the (coronavirus) pandemic. FY22 has also seen robust earnings growth of around 38 percent for the Nifty50 index. Therefore, from FY19-22 corporate earnings have grown by about 17 percent CAGR, largely due to strong earnings from commodities, banks and IT services sectors.
However, we feel that the positive earnings surprise is behind us now and we may see some moderation in corporate earnings growth due to margin pressure (because of elevated commodity prices) and rising interest rates. Currently, the Nifty earnings growth estimate for FY23 is already lowered to 15-16 percent. Even to this estimate, there could be some more downside risk.
How to protect the portfolio in a stagflation- or recession-kind of environment? Which are the pockets to look at to strengthen the portfolio?
Typically in a period of economic growth slowdown, value stocks tend to relatively start to perform better and therefore, we have increased some allocation to sectors where valuations are more attractive.
We are positive on some of the large private sector banks with credit growth picking up, credit costs normalising/coming down and valuations below the long-term average. Valuations are quite attractive in the metals sector and in the pharma sector too. Some of the niche long-term plays that we are positive on are the QSR (quick-service restaurant) segment and disruptive segments like electric vehicles (EVs).
From an investor perspective, an asset-allocation approach may also be more suitable for an investor in the current environment as per their individual risk profile and investment horizon. Investing systematically will also help to maintain discipline and benefit from rupee cost averaging.
FIIs have been on a selling spree since October 2021 and have net sold more than $ 40 billion worth of shares. Do you think they will remain net sellers for the rest of the calendar year and the outflow could top what we have since January 2022?
Yes, we have seen record outflows from FIIs in India as a result of normalisation of global monetary policy and interest rate hikes in the US and other economies, which has led the US dollar to strengthen and prompted outflows from emerging markets.
Since India has been a relative outperformer within the emerging markets (EM) pack in the previous two calendar years, we have seen profit-booking by FIIs in Indian equities.
However, we believe that a large part of the FII selling may be behind us, as markets have factored in the interest rate hikes to some extent. There may be some more FII selling in the near term if the pace of global monetary tightening is more than expected or if crude oil prices harden further.
Nevertheless, India remains relatively better positioned within the EM pack from a growth perspective and the long-term India growth story remains intact. Hence, we believe that FIIs would continue to find India as one of their favoured investment destinations over the long term.
Despite heavy selling by FIIs, the price correction is minimum. Why?
DII (domestic institutional investors) inflows have been at a record high and helped to counter the large FII outflows leading to a limited price correction.
During the October 2021-May 2022 period, FII equity net outflow has been a cumulative Rs 2.04 lakh crore compared to a DII net equity inflow of Rs 2.51 lakh crore.
Mutual fund SIP flows have also picked up considerably over the past year, from a monthly run rate of around Rs 8,000 crore to above Rs 12,000 crore presently. Retail participation in domestic equity markets has also increased during the pandemic period.
Do you think the IT space, which has seen the biggest correction among all sectors this year, is looking attractive in the current macro environment?
The IT sector correction in India has been led by a global growth slowdown and talks of a possible soft landing in the US economy. The management commentary of IT majors during the recent corporate earnings season suggests stable deal-wins and order pipeline but some flagging growth ahead. Also, despite the price and some valuation correction in IT stocks, and depreciation in the rupee, the concerns of the potential growth slowdown are overweighing on the sector.
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