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'2022 will be a year of volatility'

January 29, 2022 12:45 IST

'Making money in such markets is typically harder and investors need to put in considerable effort to identify stock ideas over the year.'

Illustration: Dominic Xavier/

Weakness in earnings delivery could severely cramp investor sentiment, forcing a re-rating of stocks, Jinesh Gopani, head-equity, Axis Mutual Fund, tells Ashley Coutinho/Business Standard.


How will the progress of Omicron impact markets this year?

As the pandemic progresses, newer and deadlier variants are affecting the global population, hampering productivity and economic output.

The latest numbers in India and the US underscore the pace at which the mutated variants are spreading, despite a high degree of vaccinations and booster shots.

Another alarming aspect to this is the pace at which children are now getting infected.

Markets will swing to the tunes of Covid for some time to come till we see medical intervention eliminate the threat completely.

Earnings projections thus far factor in strong growth recovery, despite headwinds from Omicron.

Weakness in earnings delivery could severely hamstrung investor sentiment, forcing a rerating of stocks.

What are the global cues to watch out for in 2022?

The world has enjoyed the benefits of easy monetary policy for the better half of two decades.

During this time, central bankers the world over kept rates low to propel global growth and steer clear of stagflation.

The Covid shutdowns and disruptions have now stoked worrying inflation numbers across the world.

With growth coming back, bankers are now recalibrating monetary policy to normalise the excesses and glut in liquidity.

For the stock market, which has been the biggest beneficiary of this expansionary monetary policy, a policy normalisation could jolt markets and burst bubbles, wherever they may be, rather quickly.

What should investors do?

2022 will be a year of volatility.

Making money in such markets is typically harder and investors need to put in considerable effort to identify stock ideas over the year.

In addition to the risks mentioned, we believe domestic factors and stock-picking will play a more important role in portfolio performance.

The India story has been largely insulated from long-term external factors due to proactive changes to the economic structure and policy reform.

2022 will continue to see the benefits of these unique attributes.

What about current valuations?

Third-quarter results will incorporate the full set of festival demand and the associated profits.

From our channel checks across sectors, corporate earnings are likely to marginally beat or match consensus sell-side earnings estimates.

Much of this, however, is already priced in.

Earnings misses will affect stock prices adversely as markets are looking for a reason to correct even small excesses.

We are now in the fourth quarter of 2021-2022, and as market participants, we are looking at the 2022-2023 numbers.

Valuations from that perspective have now re-entered the long-term average range.

Price-to-earnings compression was a theme we have been factoring into our research, given the normalisation of earnings.

Visibility of earnings in most of our portfolio companies looks robust thus far and accordingly, we believe the valuations are comfortably adjusted for growth.

What are your views on mid and small-cap stocks at this juncture?

Mid and small-caps have had two good years on the back of growth normalisation, new quality entrants to the universe, improving balance sheets after deleveraging, and improving efficiency metrics.

Another element that has played a pivotal role is the improving liquidity in many of these names.

As participation improves and the mid and small-cap universe gets deeper, this space has opened up bigger opportunities for investors to participate in.

We remain constructive on mid and small-caps.

However, the thumb rule to investing in these names is to do due diligence before investing and remain vigilant about the progress of the company for the duration of the investment.

In the downcycles, this segment is the first to get downgraded and drawdowns can be very steep.

What is your take on the current crop of new-age IPOs? How are fund managers assessing these companies?

The coming-of-new-age companies to the market is an evolutionary change that promises to bring to the fore new businesses and a new way of doing business in India.

We often say the capital market is a barometer for the health of the Indian economy.

Today, many of these platforms and companies play a crucial role in our lives and have become economically important segments.

Their entry into the capital markets reflects the ongoing economic change in the constitution of the capital markets and indices we track on a regular basis.

From a valuation-metric basis, the earnings trajectory of many of these companies is back-ended due to their business models.

Hence, using traditional earnings-based valuation models may not reflect the most ideal way to value these companies.

That being said, we have remained selective in our approach to participating in the primary markets, as well as in IPOs.

A qualitative approach, in our experience, is a better medium to explore and invest in these companies.

Like the rest of the market, we are evolving our research methodologies to better understand such companies, as more and more firms with back-ended earnings trajectory crop up.

Feature Presentation: Aslam Hunani/

Ashley Coutinho
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