In conversation with Anoop Bhaskar on the Good, the Bad and the Ugly of markets

Amidst skyrocketing inflation, geopolitical tensions and a potential rise in interest rates, the rally in global equities has come under a lot of scrutiny nowadays. Moreover, many investors are skeptical about the durability of pullback rallies.  With risks emanating from global factors, it’s imperative to take a 360 degree view of the market conditions.

On this backdrop, we spoke to Anoop Bhaskar, head of equity at IDFC Mutual Fund. In a freewheeling conversation, Anoop shared his market view and offered some invaluable insights to investors.

To begin with, Anoop drew attention to the four fundamental market drivers—macroeconomic factors, growth in corporate earnings, liquidity and valuations. The webinar’s high-point was his subtle reference to the challenge of balance political cycles and market cycles.

Below are some of the major highlights of our conversation with Anoop Bhaskar

Views on Macros

• Despite three waves of the coronavirus pandemic, the performance of the manufacturing sector has been resilient.
• There haven’t been recessionary pressures although there’s been softness in the performance of the services sector, which needs to see some improvements.
• Amongst the three determinants of interest rates—credit growth, inflation and GDP, only inflation has so far been a worrisome factor for India.
• Here too, inflation appears primarily supply driven which means, change in the monetary policy may hardly help reduce the headline inflation. Which means the economy doesn’t seem overheated.

On earnings growth

• Earnings Per Share (EPS) of BSE 200 companies is expected to grow at 79% in FY22—from Rs 173 in FY21 to Rs 310. This would be the best annual growth after 2003.
• In FY23, EPS of BSE 200 companies is likely to climb further to Rs 374—a 21% jump.
• Between FY22 and FY24, cyclical sectors are expected to clock 17% growth while non-cyclicals may post 21% growth.
• Autos, industrials, consumer discretionary and banks are forecasted to clock 64%, 41%, 33% and 28% profit growth respectively between FY22 and FY24.
• India’s two-wheeler sector might see a rapid transition from Internal Combustion Engine (ICE) to Electric Vehicle over the next 3-5 years.
• Commercial Vehicles (CVs) may also see a volume uptick in the calendar year 2022 and 2023.
• With the opening up of the economy, Information Technology (IT) might see some earnings pressure.

On Liquidity

• Nearly 50% of overall FPI holdings in India are in financial companies, thus, banks fell sharply under the recent market downtrend.
• Strong domestic flows have helped negate the impact of Foreign Portfolio Investors (FPI) selling
• Effective marketing campaigns such as Mutual Fund Sahi Hai have been instrumental in channelizing retail savings to equity markets.
• Splendid returns generated by Indian equities over the last two years have drawn new investors to markets.
• Fear of Missing Out (FOMO) on stock market rallies has made the chorus even louder.

On Valuations

• Market-cap-to-GDP ratio is above its 5-year average even after smoothening out the effects of the fall in the GDP due to coronavirus pandemic.
• Except in the case of small caps, valuations in other market cap segments are close to the upper end of the 15-year range.

Market outlook

As compared to that of 2018, the regulatory environment appears benign but global macros look deteriorated thanks to rising inflation and geopolitical tensions in Europe.

On the positive side, corporate and banking balance sheets are in good shape at present as compared to those in 2018.

Price-to-Earnings (P/E) multiples may contract hence focusing on earnings is crucial.

Market returns are likely to be back-ended rather than front ended. Meaning, the average returns for the next few years will be chiefly driven by returns in the farther periods rather than those in the foreseeable future.

Over the next 1 year, Nifty is likely to remain range-bound between 16,000 and 19,000. The breakout may happen only if crude oil drops drastically, say to USD 70/bbl or the Federal Reserve hikes interest rates only a couple of times.

Some thought-provoking remarks…

India has a large market which might give it an edge in attracting giant multi-national companies.

India is likely to grab a fair share of incremental global exports. But for that, India must first prove its manufacturing prowess on the global scale and play according to its strengths rather than squandering efforts on all fronts.

India may have to attain global scale, adhere to globally competitive cost structures and build unparalleled expertise in at least a few areas of manufacturing. In this context, cotton-based textiles, two-wheelers and select auto ancillaries, to name a few, appear brighter spots.

Finally, two crucial bits for investors

• This isn’t a time to sellout and sit-out; 10%-15% of the portfolio may still be in small cap funds.
• Investors must have realistic expectations from markets. Over-committing to the markets at this juncture may bring about ROFI (Regret of being fully invested) feelings.

You may also like to read: LIC IPO may recreate the Maruti moment of 2003 for markets: Nilesh Shah

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