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'Growth will be driven by investments rather than consumption'

May 31, 2022 09:54 IST

'A soft landing of the Indian economy would be a long-term positive for the equity markets.'

Illustration: Uttam Ghosh/

Markets have come off sharply this year amid the US Federal Reserve's decision to shrink its balance sheet.

Pressing ahead, returns will be driven by earnings growth rather than a valuation rerating, says Jyotivardhan Jaipuria, founder and managing director, Valentis Advisors.

In conversation with Sundar Sethuraman/Business Standard, he says foreign flows may move to some of the under-performing markets within the emerging markets (EMs).


How will a tighter monetary regime impact equity markets?

The rally in equity markets after COVID-19 was partly led by global central banks, especially the Fed, pumping in a great deal of liquidity into the system.

The Fed balance sheet expanded from roughly $4.5 trillion pre-pandemic to $9 trillion.

As the Fed shrinks its balance sheet, we think there will be some pressure on elevated equity-market valuations.

In the next few years, returns will be driven by earnings growth rather than a valuation rerating, which was a feature in the past five years.

Has the market now priced in the aggressive Fed rate hikes?

History shows that markets normally struggle in the early phase of a Fed hike, but recover and turn positive a year later.

We think the market could behave similarly this time around, assuming the Fed is able to achieve a soft landing.

This will cap the downside to the market.

However, we expect the market to still worry about the probability of a stagflation, which caps the upside as well.

We believe the market is in a consolidation range with a time correction until inflation starts to ease up.

Will foreign portfolio investor (FPI) outflows from domestic markets live on?

FPI flows are partly a function of flows into EMs, and partly a function of allocation to India from EM flows.

We think EM flows will be under pressure in the near term, given the rise in interest rates globally.

India has been a strong outperformer, and money may move to some of the under-performing markets.

Also, India's valuation -- relative to other EMs -- is at very high levels.

However, the longer-term story of India is intact, and investors generally acknowledge that India will be amongst the fastest-growing economies over the next five to 10 years.

While we see near-term FPI outflows unceasing, we are positive about strong FPI flows as valuations become more reasonable.

Do you think there is a case for India's valuation premium vis-a-vis other EMs to shrink?

India has always traded at a valuation premium to EMs.

For example, on a price-to-earnings basis, the valuation premium on average has been at around 55 per cent.

However, the current valuation premium at around 90 per cent is at an all-time high and will probably come closer to the mean.

India will continue to trade at premium valuations, but current premiums appear excessive.

Were you surprised by the Reserve Bank of India's out-of-turn hike? Will it torment the equity markets?

The RBI's move did not surprise us, but the timing did since the central bank did it between meetings.

Given the elevated inflation rate, a hike was inevitable.

This, of course, spooked the markets since the timing was unexpected.

While rate hikes per se are not good for the equity markets, a sustained high inflation is probably worse.

We think a soft landing of the Indian economy would be a long-term positive for the equity markets.

Supply-side disruptions have primarily fuelled price rise. How effective will the central bank intervention be in tempering inflation?

There are a few supply-side factors that will hopefully ease.

The first is the Russia-Ukraine conflict.

The second is supply bottlenecks due to the China lockdown. The economy is still very resilient.

Being mindful of full employment in the US, inflation will remain elevated unless the economy dawdles.

This is where the central bank policy will play a role.

How have the January-March quarter earnings been? How will a rise in inflation in commodity prices influence corporate earnings?

We think the inflation pressure will hit the April-June quarter more than the March quarter since a commodity price increase was felt only for a few weeks in the March quarter.

The March quarter has so far been in line with companies signalling margin pressure.

However, when we think of the overall earnings growth, a possible fall in margins for commodity users will be partly offset by a rise in margins for commodity producers.

The overall downgrades will be mellow.

Which sectors are you bullish/bearish on?

Overall, we think growth will be driven by investments rather than consumption over the next few years.

We are positive on capital goods, cement, and financial.

We are also closely looking at automotive.

We are negative on consumer staples, not losing sight of the valuation concerns.

Do you expect strong inflows from retail investors and domestic mutual funds to persist, seeing that returns this year may not be impressive?

We may see some slowdown in retail inflows. However, we think a lot of investors have matured and kept their systematic investment plan money active in a downturn.

The near-term impact may not be very sizeable.

In the longer term, we continue to expect retail India to increase its share of equity investments, bearing in mind Indians are underweight on equities.

Feature Presentation: Aslam Hunani/

Sundar Sethuraman
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