Long-term stock market is positive but remains cautious at current levels | INTERVIEW

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Domestic markets have been tight for the past few weeks and earnings haven’t been as bright as we’ve seen in previous quarters. Given the multiple headwinds ahead, earnings in sectors other than financials and oil and gas could be down, said Shyamsunder Bhat, CIO, Exide Life Insurance in an interview with Kshitij Bhargava of FinancialExpress.com. He further shared his perspective on new era internet companies and offered advice to investors amid the current market uncertainty. Shyamsunder Bhat also added that he had a positive long-term view of the markets, but remained cautious on current valuations. Here are the edited excerpts.

We are facing multiple headwinds, inflation, geopolitical crisis and rising interest rates, what should investors do at this stage?

Yes, there are plenty of headwinds right now, with stubbornly high inflation, shrinking liquidity and rising interest rates, and uncertainties from the Russia-Ukraine crisis. Another headwind is the risk of an earnings downgrade (which is concerning, as valuations aren’t cheap, at 18.5x FY24 earnings by current estimates).

But we must also keep some positives in perspective: given the significantly high level of vaccination in India and the relatively limited impact of the Omicron variant seen compared to previous waves, concerns on this front have thankfully abated. With higher GDP growth (albeit lower than previous forecasts) compared to most other major economies, strong foreign exchange reserves, FII’s long-term position in Indian equities should be further strengthened, as some other emerging markets have concerns on the economic/geopolitical front. Although we have seen significant FII exits over the past few months due to a combination of factors, this should not be interpreted as a change in FII’s stance towards Indian equities. The Indian stock market has fared much better than global markets not only over the past year but also over the January to March quarter where we have seen a 5-8% sell off in indices MSCI World and MSCI Emerging Market. Strong support for retail inflows into domestic funds is likely to continue, with equities being among the few options for retail savers to earn tax-adjusted returns above inflation over the long term.

Currently, there are headwinds for equities as well as for bonds in general. Asset allocation would vary based on an individual’s age, risk appetite, time horizon, and income/cash needs. Or, investing in asset allocation funds active in the ULIP space is another portfolio strategy option. More importantly, investors shouldn’t view stocks from a one- or two-year perspective; their prospects would necessarily have to be much longer.

Earnings so far haven’t been great, what are your expectations for Indian Inc’s overall fourth quarter earnings?

For the fourth quarter, strong earnings growth of more than 20% (year-on-year) is expected in the BSE Sensex/NSE Nifty 50 universe. gas. Excluding these two sectors, earnings growth could be well below (in the single digits), dragged down by sectors such as automotive, cement and consumer packaged goods. So far, we’ve seen a good streak of numbers in the financial sector and some disappointments in the IT sector: these are the only two sectors that have reported numbers widely so far.New age internet stocks have corrected sharply and there are concerns about valuations, profitability and more. What is your opinion on these actions?
We have generally avoided investing in the IPOs of these new era companies, both because of the valuations at which these IPOs have launched, as well as the uncertain time frame in which these business models may generate significant profits. In the current environment of tight liquidity and a possible slowdown in private equity financing, valuations may not rebound strongly even though these stocks have corrected significantly. We therefore remain cautious in this space.

LIC’s IPO is now live, do you think this will impact the market in the short term by sucking up liquidity?

The revised fundraising being significantly lower than that initially envisaged, the risk in terms of liquidity suction is no longer a concern. The decrease in free float as a percentage of equity, as well as the decrease in valuation also compared to that previously considered, are positive. However, it might be difficult to meet the total divestment/privatization estimates in the current financial year, given that there will be no new sale of stake in LIC for 12 months from the IPO. in stock exchange.

Where do you see Sensex, Nifty by December 2022?

The directional intent provided in last year’s budget was also well followed in this year’s budget, in terms of creating an environment conducive to long-term growth. We have seen a 19%-25% gain in the large cap/mid cap indices over the past year, which also needs to be seen in the context of the strong earnings growth expected for this year. However, earnings growth in FY22-23 and FY23-24 could moderate in the 10-12% range, with the higher base in FY21-22 and likely difficulty in business capacity to pass on their higher costs (unless demand recovers strongly). The outlook for the indices for calendar year 2022 should be seen in this perspective.

We do not have specific targets for indices, as our investment strategy is specific to stocks. Also, as insurers, our investment outlook is longer term. We have a positive long-term outlook for our equity market, but we remain cautious at current levels going into the current year. There are, however, a few sectors/individual stocks that could outperform the indices this year. We are overweight in the financial services sector (which should perform well in terms of margins in a scenario of higher interest rates and with borrowing costs under control), and in nationally oriented sectors such as the cement and consumption, and on certain companies which seem to be placed in competition from the point of view of PLI schemes. The IT sector is the one in an environment of strong demand and a strengthening US dollar, and this sector could also do well: disappointments on the margin front may have already been reflected in the sharp correction in stocks of this sector. sector.

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