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Markets could consolidate in near-term: Expert

Interview: Shyamsunder Bhat, chief investment officer, Exide Life Insurance

Profile Brochure_V2.indd Shyamsunder Bhat, chief investment officer, Exide Life Insurance

After falling for the past few sessions, major domestic stock indices rebounded on Thursday; both the BSE Sensex and NSE Nifty50 were up 0.5 per cent. In an interaction with THE WEEK, Shyamsunder Bhat, chief investment officer at Exide Life Insurance, shares his outlook on stocks, preferred sectors, and how he sees the boom in internet start-ups going public, among other things. Excerpts:

Even as the COVID-19 pandemic has continued to weigh on global economies, from the Sensex to S&P500, major stock market indices have hit new highs in July. What is driving this synchronised rally and market resilience?

We have witnessed a rise in global equity markets consistently for the past 5 quarters now. The panic low in March last year provided the base for the commencement of this long rally. The large infusion of liquidity by global central bankers drove the rally in the first phase. We have also seen a record number of new retail investors in global equity markets as well as existing investors possibly increasing their equity exposures significantly. This has added to the liquidity inflows.

Positive surprises in corporate results added a fundamentally supporting factor to the rally. In recent quarters, the rapid commercialisation of several vaccines to address the pandemic, and implementation of vaccination programmes globally, are aiding the positive sentiment for equities. While we may still not be out of the woods from the COVID perspective, global economies are much better placed today to address the same as compared to when it first struck. Balance-sheets of mid and large corporates too, have been resilient and in many cases, emerged stronger over the past year.

From an Indian context, how do you see the markets moving ahead through the year?

In the near-term, markets could consolidate or post a small correction, since we have not had even a 10 per cent correction in the past 5 quarters where large-cap indices have approximately doubled from lows, and mid-cap indices to an even much larger extent. A time-correction is more likely than a price-correction; markets could pause to digest this 15-month up-move.

A strong global recovery, low interest rates, a normal monsoon, and government measures could aid economic growth and corporate profitability in the remaining three quarters of FY22. This could be despite some near-term challenges due to restrictions in some of the states, and concerns over a potential third wave, but there are indications of an accelerated vaccine availability in the July-December period. Higher commodity prices and the impact of the second wave on consumer sentiment would be closely watched.

A major problem India is facing is high inflation. Many feel the days of low interest rates are reducing and RBI commentary will perhaps start shifting away from its everything for growth push. What are your thoughts?

Inflation has risen above RBI’s comfort zone of 4 per cent +/-2 per cent over the past couple of months. The large liquidity that one has witnessed flowing into global equity markets has also found its way into commodities, leading to a significant increase in prices in metals and crude oil. An increasing demand (due to a recovery in global economies) and limited supply has added to the up-move. The RBI is committed to provide ample liquidity in the system and ensure orderly market conditions, and in order to manage the government’s borrowing programme without higher rates. Accordingly, it has introduced secondary market G-Sec acquisition programmes (G-SAP) 1.0 of Rs 1 lakh crore during the April-June quarter, followed by another Rs 1.2 lakh crore under G-SAP 2.0 announced for the July-September quarter. However, higher fiscal supply may continue to be an overhang for the longer end of the yield curve, which could continue to remain on a relatively higher level compared to the shorter-term rates. We have already witnessed a rise in bond yields over the past month; RBI’s support could prevent a sharp rise.

What’s your assessment of the corporate earnings in the June quarter?

While there would be a sequential impact due to partial lockdowns in several states in the second COVID wave, this quarter happens to be one with a favourable base impact of the corresponding quarter last year which was significantly impacted by a stringent and extended national lockdown. Therefore, a sharp year-on-year growth is expected in corporate earnings. Markets are looking toward FY23 earnings and a three-year CAGR (FY20-23) and therefore, corporate earnings for this quarter may not have significant impact on the broader equity market, though we could see stock-specific reactions.

Which are the sectors you feel are likely to do well over the next 12-24 months?

We are positive on the financial sector space, even more so since it has been a relative underperformer in the past few months due to the stress caused by the second wave. We had witnessed a similar scenario last year when this sector lagged the market rally in the first few months, but we saw a rapid re-rating subsequently, in line with the economic recovery. We expect a similar trend in the present phase as well. We are also overweight on the pharmaceuticals and consumer-oriented sectors (particularly the consumer durables, some segments in the auto space and select FMCG companies as well), as a revival in the economy, global opportunities and improved consumer sentiment, and per capita income over the longer-term, could be drivers for these sectors.

India's primary market is heading towards a boom in tech and start-up IPOs. What is your view on this start-up/internet sector, where many have seen a surge in revenues but most still are not profitable?

It is good to see a vibrant primary market, a reflection of the sustained buoyancy in the secondary market. IPOs of companies (in general) with a reasonably good management competence, track-record and growth potential are likely to continue to see a good response from investors. If these companies happen to be from either emerging sectors or sectors where there are very few listed entities, such IPOs could witness a relatively higher investor interest (even if the IPO pricing is difficult to comprehend!). However, investors will need to be cautious and selective in their assessment of some of these IPOs, particularly where the visibility of profitability could be several years away.

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