'In the short term, we may see some disruptions due to Covid, but in the medium-to-long term, we should keep an eye on US inflation and 10-year bond yields.'
The markets have been concerned about the sharp rise in Covid cases and the stringent mobility curbs across key Indian cities.
Nischal Maheshwari, CEO for institutional equities at Centrum Broking, tells Puneet Wadhwa that over the medium-to-long term, economic growth will offset risks from rising global rates and virus threats.
Can the spike in Covid cases pull the markets further down?
On the Covid front, we do not believe that any successive wave will have a meaningful impact on the outlook for growth, given that vaccination is in full swing.
In the short term, the markets may remain weak due to rising Covid cases.
However, over the medium-to-long term, economic growth will offset risks from rising global rates and virus threats.
Given we may not see the same kind of growth in the Nifty this year, stock picking is the way to go.
In the short term, we may see some disruptions due to Covid, but in the medium-to-long term, we should keep an eye on US inflation and 10-year bond yields.
Any disruptions on these two factors could reverse foreign institutional investor flows.
For now, we expect FPI and FII inflows to continue in the emerging markets, especially in India, at a robust pace.
Your estimates for corporate earnings growth?
Optimism about vaccinations and various cost-cutting measures implemented last year, the earnings outlook for India Inc has improved tremendously.
Overall, Nifty earnings are expected to move up by 30-40 per cent in the coming quarters.
The Nifty trades at a price-to-earnings (P/E) of 22x and 19.5x for FY22E and FY23E, against the five-year average of 24x.
But what is heartening is earnings per share (EPS) growth of the Nifty at over 40 per cent for FY22 (coming from a low base of FY21) and further 16 per cent in FY23.
These earnings growth estimates will keep the market in good stead.
Can earnings disappoint in the next two quarters given the micro-lockdowns across key Indian cities?
As various state governments have permitted manufacturing operations to continue, we don't see a big impact in the earnings of the manufacturing, pharma, BFSI, and industrial sectors.
The sectors that can witness an impact, albeit a minimum one will be consumer durables, real estate, and to some extent four and two-wheeler sales.
The markets have factored in this to a large extent over the last few days.
We don't expect the micro-lockdowns to continue beyond the June quarter.
How soon do you expect global central banks to close the liquidity tap?
If one observes the US inflation dynamics for the last two decades, there will not be any strong evidence to believe that inflationary pressure will persist.
Instead, it is transitory in nature.
In this context, any tightening measures from major central banks in 2021 are ruled out.
However, if inflation risks materialise, gradual withdrawal of liquidity can't be ruled out, especially from the RBI and US Fed.
Your sector preferences...
We expect manufacturing to perform better than services in FY22, as the announced government capex and production-linked incentive schemes will come into play.
Also, given the recent lockdown measures, the services sector can see some challenges due to lower footfall and other stringencies.
However, activities like construction and factories are kept open with certain protocols - giving an indication that the manufacturing sector will be less hit.
We are overweight on financials, construction, metals and mining, and pharma, playing the 'economy + manufacturing' theme.
We have further increased weighting in the BFSI sector with focus on corporate banks.
Our top 5 sectors in terms of weighting are financials, IT, energy, consumer goods, and auto.
Our mid- and small-cap stock preferences are Jindal Steel and Power, LIC Housing Finance, KEC International, Aarti Drugs, NCC, Bajaj Consumer, and Dhanuka Agritech.
Can the manufacturing sector come under stress as labour heads home amid lockdown fears?
The second wave will not have the same impact as the first on the industry, given we have learnings now.
The government is also taking adequate measures to ensure that industry is less inconvenienced by allowing businesses to function and supporting movement of goods.
Capital goods will be a major beneficiary of the capex cycle revival, but it will take time.
Similarly, consumer durable goods should do well on the back of lockdowns where household help may be restricted once again.
And the sectors to avoid...
Though there will be limited impact of the pandemic on the broader economy, certain sectors will be impacted.
It will be a challenging FY22 for sectors like aviation and hotels.
They are best avoided for the next few quarters.
Sectors -- such as specialty chemicals, pharma, IT and FMCG -- will continue to do well this year on various growth drivers, such as exports, PLI scheme and domestic consumption.