Indian Equities have delivered steller returns of around 32% from January to October month this year in FY21on account of favourable macroeconomic environment, the Government & Central Banks policy stimulus, strong corporate earnings and inflows from retails and institutional investors. These factors have helped Indian stock markets to outperform among the largest economies. But as the year end is approaching, the tide is turning against the Indian equities now. As a result, Indian markets have already corrected 8%-9% from it’s all-time highs from October month to till now.
Emergence of the highly transmissible Omicron variety could play havoc in the economy recovery plans. The Central banks and the Governments could also find it difficult to reverse easy liquidity measures & this could turn out to be disruptive despite the wide availability and decent coverage of vaccines either in developed or in the developing economies across globe.
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Emerging markets such as India have already felt the tremor with foreign fund outflows on account of multiple reasons like overvaluation, slowdown in earnings growth, spread of omicron virus and strengthening of dollar index. So, it is now bracing for a possible hike in the interest rate domestically due to Fed hawkish policy instance. It’s not just that the Federal Reserve is only considering tapering. But the European Central Bank too has decided to join the tapering club and even the Bank of Japan will taper its buying of corporate bonds and commercial paper. The Bank of England has already done a rate hike, while central banks in Chile, Brazil, Hungary, Mexico, Norway and Poland all hiked their policy rates this month. Domestically, the first interest rate hike will be contingent on Fed action and the progress of Covid, although bond market indicators suggest that it isn’t imminent.
While it is prudent to brace for some more short-term weakness, the key question is whether investors should run away amid the softness or invest more amid correction. It is recommended unequivocally that investors should use this opportunity to buy on decline strong fundamental stocks at reasonable pricing. So, it is clear from above discussion that markets are heading towards a corrective mode packed with more volatility going ahead in a short period. Consequently, not as good as returns could be expected from equities asset class. So, this may be a reason why the traders or investors are now heading to safer asset classes. Gold is currently trading above 48,000 – crucial level but with the Fed’s tightening outlook may keep the US dollar supported and this may weigh on yellow metal prices going ahead. Silver is hovering at 62,000 and it’s long term trends is still intact on account of strong demand for industrial metals.
Notwithstanding that, long-term growth prospects for the Indian equities are still promising and are primarily fueled by domestic demand & uptick in sale volumes in end user industries. According to MOSPAI, the GDP growth in the second quarter was 8.4% compared to 7.4% decline Y-o-Y basis. Moreover, MPC was prompted to retain economic growth at 9.5% for FY22. Growth rate is expected to be 9%-10% in FY23. Rural demand is showing resilience and farm employment picking up with robust performance by agriculture and allied activities. Digital transformation continues to accelerate as India’s enterprises seek faster, value-driven solutions to secure their workforce, applications and data – a boost for the IT/ITes sector. China+1 policy & diversification of supply chain and strong domestic demand will be highly beneficial for the chemical industry story, increasing healthcare expenditure and rising domestic and export demand will keep pharma growth trajectory on track, reductions in excise duty and state value-added tax on petrol and diesel would also support consumption demand. Disinvestment in PSUs space would be a value unlocking proposition.
Overall, we are not expecting any major negative earnings impact on Nifty in the next couple of years, as the two heavyweight sectors – namely financials and technology look fine. Riding on recovery, digitalization and better asset quality mix would lead financials to manage the pressure on their interest margins. The unprecedented demand for digitization and the gradual easing of talent shortage, robust order book augur well for technology players. The diversified heavyweight conglomerate Reliance Industries & Vedanta could benefit from recovery in all its businesses with broad base growth of economy and metals may remain in the limelight with revival in industrial demand. With very little weight of cyclicals, we rule out meaningful downgrade to Nifty earnings. Whereas insurance, hospitality, travel and auto along with auto ancillary stocks may remain under some stress due to post pandemic effects & semiconductor issue.
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Amid turmoil in the Financial markets, there are certain pivotal events to look out for first and foremost, how much contagious is this new variant of Covid – Omicron and its subsequent impact on the economies. Second being tapering – rather a pace of tapering from the US and developed economies central banks. Third major event in this line would be upcoming Budget of FY23. Thereafter, all eyes on the whatmonsoon have for us in store. Structurally, it would be key monitorable pace of digitization and automation, policy stance on biofuel, electrification, healthcare and infrastructure expenditure. Probably, the most buzzing event is Inflation – whole price inflation has been very high in recent months, much higher the retail inflation. Here comes a question whether today’s wholesale inflation will become tomorrow’s retail inflation, when demand picks up.
From a medium to long-term viewpoint, the current correction, along with increased corporate earnings in upcoming quarters would give a good platform for better future returns from Indian equities. A bottom-up, strong earnings based stocks are recommended. From a top-down perspective, we can bet on export-oriented sectors ranging from technology to chemicals. Covid recovery could benefit sectors like travel, hospitality etc. On the industrial front, companies with order book visibility, lean balance sheets with minimum leverage, and companies gaining from AtmanirbharBharat & PLI schemes, should be on the radar. On Portfolio level, a suitable asset allocation with optimum mix of equity, debt and other assets in the core portfolio as per the risk tolerance, financial goals and time horizon should be a priority.
Views expressed in this article are the personal opinion of Mayank Kaushik, Spokesperson at Trustline Securities.
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