Hemant Kanawala of Kotak Mahindra Life
“Earnings and interest rates will be the key factors influencing equity markets going ahead,” said Hemant Kanawala of Kotak Mahindra Life Insurance Company in an interview to Moneycontrol.
He believes that corporate India is poised for steady earnings growth over the medium term. Any disappointment on that front will be the main headwind for the market, he says.
With respect to inflation, a key variable to watch for will be the opening up of the Chinese economy and its impact on the supply chain and demand, says the Senior Executive Vice President with more than 15 years of experience in fund management. “Normalisation of the supply chain will mitigate inflation, but release of pent-up demand in China can impact inflation adversely,” he added. Edited excerpts of the interview:
What are the key factors that can influence equity markets? Is it looking overvalued now?
Earnings and interest rates will be the key factors influencing equity markets. Corporate India is expected to show steady earnings growth over the medium term. Any disappointment on that front will be the main headwind for the market.
Although valuations have normalised on an absolute basis over the last one year as markets are flat, they continue to look expensive relative to fixed income as interest rates have increased by more than 75 basis points (bps) during this period.
Do you think the Reserve Bank of India would pause interest rate hikes from February?
After the last Monetary Policy Committee (MPC) meeting, the RBI Governor informed that satisfactory progress has been made on controlling inflation, and that they expect inflation to come below 6 percent next year.
However, they are watching the situation closely and will respond to evolving dynamics in the geopolitical situation, the monetary policy of major central banks, and other local factors.
Will the US Federal Reserve be able to declare victory over inflation by the end of the financial year?
The Fed has undertaken aggressive rate hikes and quantitative tightening to control inflation. The full impact of the same is likely to be felt over the next few quarters.
One key variable to watch for with respect to inflation will be the opening of the Chinese economy and its impact on the supply chain and demand. Normalisation of the supply chain will mitigate inflation, but the release of pent-up demand in China can impact inflation adversely.
Are you gung-ho on the capital goods and defence spaces?
A fair amount of traction is seen in these segments on the back of reforms announced by the government, like reduction in corporate taxes, production linked incentive (PLI) schemes, and indigenisation of defence procurement.
High capacity utilisation in select industries and healthy balance sheets of corporates and banks is helping the investment cycle. Although valuations are above average and hence upside may be limited in the near term, medium-term prospects of the sector look promising.
Do you see a major correction in the IT space after Q3FY23 earnings?
The IT sector has corrected over the last one year due to concerns over the US economy. This has to some extent reduced the inflated expectation from the sector.
The sector’s performance will continue to be influenced by the commentary on US growth as there is strong linkage between the revenue growth of Indian IT and the US and European economies. Hence, commentary of IT companies following Q3FY23 earnings will need to be monitored.
Any red flags after the September quarter?
Some slowdown is seen in some of the discretionary consumption post the festive season in October. Also, exports remain under pressure due to a slowdown in the global economy. However, there is expectation of a pick-up in consumption due to a good Rabi crop and a strong marriage season.
Also, as discussed above, opening up of the Chinese economy may help global growth and Indian exports.
In auto, which segments do you prefer as all are not on the same plane?
We expect the commercial vehicle segment to do well as industrial activity picks up. Industry sales are still below the all-time high levels reached in 2019.
In other segments, one needs to be company-specific as it has been observed that the company which launches new products is able to garner market share and consequently has a strong earnings cycle.
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