'The recent correction in indices has made the markets cheaper to invest for the long term.'
Indian equities -- in line with their global peers -- are finding it hard to stay at higher levels amid the ongoing geopolitical turmoil.
Prakash Kacholia, managing director, Emkay Global Financial Services, tells Puneet Wadhwa/Business Standard that the domestic market is in a cyclical bull run and the more prudent thing for investors will be to buy on dips.
Have the markets now fully discounted the possibility of higher commodity prices amid a prolonged war?
The current situation in Eastern Europe remains fluid.
Sanctions imposed on Russia have already started biting, and these are not going to go away soon.
Persistently high oil prices may adversely impact growth, especially in India.
These facts are already known, and therefore, priced in, to a large extent.
Would you term India as a 'sell on a rally' or a 'buy on dips' market?
The domestic market being in a cyclical bull run, the more prudent thing would be to buy on dips.
The recent correction in indices has made the markets cheaper to invest for the long term.
From a three months' or six months' perspective, the markets would be in a consolidation phase.
From a one-year perspective though, one should be long on equities simply because the prospects for economic growth in a large consumer market like India is very high.
Do you think domestic institutions and retail investors have the muscle to hold the markets at the current levels?
The outflows from India are mainly a response to exogenous factors and not that much of endogenous factors.
India is likely to attract fund flows but three conditions need to be met to see consistent inflows: i. Greater clarity on the trajectory of the US normalisation programme; ii. the policy positioning of the RBI; and iii. a fair assessment to be possible of the impact of macro headwinds that may emanate from persistently high oil prices.
To what extent are the markets factoring in the headwinds?
The macro headwinds associated with geopolitical factors may be short-lived.
If we look at the charts from World War I & II, Vietnam War, or the War on Terror, we can see clearly that the equity markets fell in the immediate term but revived over the medium term.
The adverse macro impact through high oil prices may have an impact on growth, but the rising Dollar Index may moderate the net impact.
What about earnings growth?
The commodities shock may have negative implications but the aggregate Nifty profit may be fairly resilient in a downside scenario.
This is assuming that oil stays at $100 per barrel, GDP growth is lower by 100 bps, and the average Dollar/Rupee exchange rate is 78.
Earnings resilience will come from the big four sectors that will either benefit (oil & gas, metals), or will see the least or a negligible impact of higher crude and commodity prices on their growth and profit margins (information technology and banks).
There is a scope for lower PAT (profit after tax) in FY23 to the tune of 30 per cent, 20 per cent, and 10 per cent in auto, cement and consumer stocks, respectively.
At an aggregate (Nifty) level, however, some of the negatives may be neutralised.
Have you cut earnings expectations for the March 2022 quarter, as well?
The downside for the Nifty appears limited as both price-to-earnings (P/E) and yield gap are below their respective 10-year averages.
Sector-wise, metals, oil & gas, utilities, telecom, IT services, and selectively banks and pharma may be preferred at this juncture.
Though Nifty50 profit saw a swift recovery after the initial pandemic impact, sequential profit growth now appears to be stalling, affected by margin pressure, higher input cost of production, weaker-than-expected rural demand, and the last wave of the pandemic.
The net profit growth expectation for the Nifty50 in FY22 is over 40 per cent, and around 20 per cent in FY23.
What are your market return expectations in FY23?
Opportunities are spread all over. However, stock selection is key.
The returns generated in the past two years, if we exclude the recent past, were quite phenomenal and this may not be the case in the coming year.
The return from well-managed portfolios may be around 15-20 per cent, at best.
Are the markets expecting any policy response from the government to cushion the impact of the geopolitical crisis on the macros and India Inc?
A basic policy framework that acknowledges the requirements of growth with inflation is already in place.
What is left to be taken care of is fuel inflation, as it has a direct impact on the general price level.
Easing of supply-side pressures may be required in effectively combating the price level threats.
Feature Presentation: Aslam Hunani/Rediff.com