‘Changes in interest rates, liquidity to drive market’
The recent up-move in the markets has led to some elevated valuations, says SAILESH RAJ BHAN, deputy chief investment officer – equity investments, Nippon India Mutual Fund. He tells Ashley Coutinho in an interview that the growth to valuation equation is favourable to large-caps given the low base of earnings over the last five years. Edited excerpts:
What are the key triggers for Indian equities going forward?
Indian companies have shown strong earnings momentum in the first quarter of financial year 2021-22 (Q1FY22) and good distribution of earnings, especially from global growth sectors such as metals and IT services.
The inability to pass on higher commodity prices, rebound in inflation and its impact on demand are the key risks for the economy. The festive season will be a clear reflection of the impact on incomes due to the Covid-19 pandemic and any disappointment there will be important to watch. Also, global shifts in interest rates and liquidity driven by central bank action will also dictate market movement.
EARNINGS IN Q1 HAVE BEEN BETTER THAN MARKET EXPECTATIONS IN SECTORS THAT HAVE BEEN SUPPORTED BY THE RECOVERY OF GLOBAL GROWTH LIKE IT SERVICES AND METALS. HOWEVER, DOMESTIC ORIENTED SECTORS BORE THE BRUNT OF LOCKDOWNS AND ONLY STARTED TO RECOVER IN THE LATTER PART OF THE QUARTER
What is your take on current valuations?
The recent up-move in the markets has led to some elevation in valuations in India. However, the strength of earnings recovery has surprised market participants. The earnings recovery is broad-based, making it more sustainable. The low base of earnings of the last five years and measures like production-linked incentive scheme, China + One opportunities and benefits of past reforms are yet to flow through.
What are is view on mid- and small-cap stocks at this juncture?
Mid- and small-cap businesses appear to be well placed for a reasonable earnings recovery. However, the recent outperformance of these stocks makes the large-cap space preferable from a risk-reward perspective. The growth to valuation equation is favourable in the large-cap space, given the low base of earnings of the last five years and economic recovery cycle driven by both global and domestic demand.
What are your thoughts on earnings growth in Q1?
Earnings in Q1 have been better than market expectations in sectors that have been supported by the recovery of global growth like IT services and metals. However, domestic oriented sectors bore the brunt of lockdowns and only started to recover in the latter part of the quarter.
Which sectors are you betting on?
SAILESH RAJ BHAN Deputy CIO – equity investments, Nippon India Mutual Fund
Domestic demand driven sectors like manufacturing, capital goods, and hospitality should show material recovery in growth, especially given the low base in the last several quarters. Global sectors can see consolidation, given their already strong performance in FY21 and the rise in valuations.
What is your take on banking and non-banking financial company (NBFC) stocks?
Most banking companies are very well capitalised and have managed the crisis very well. Large banks also have benefited from a better credit cycle on the corporate side, and are well positioned for growth recovery over the next few years. However, NBFCS have suffered more than usual because of their weak customer profile and will have to watch out for asset quality changes over the next few quarters.