Low-interest rates keeping equities attractive; upside in commodity stocks now limited | INTERVIEW

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June 03, 2021 4:17 PM

There is a possibility of a cyclical strength extending from here, however, investors need to be careful while playing a theme such as commodities, particularly after an excessive rally.

Stocks to buyOn an overall basis, a majority of companies have delivered earnings better than expected in the Jan-Mar quarter.

Low-interest rates bode well for stocks, making them an attractive investment option for long-term investors, said Shyamsunder Bhat, Chief Investment Officer at Exide Life Insurance, in an interview with Kshitij Bhargava of Financial Express Online. The market expert believes investors are looking beyond the next quarter towards financial year 2022-23 expecting a growth conducive environment, hence pushing stock markets higher. The market veteran with over two decades of experience added that metal and other commodity stocks might extend their rally but finds upside to be limited from here on. Here are the edited excerpts.

We are seeing a gradual decline in the number of covid-19 cases and stock market is rising. However, covid cases are still above the first-wave peak, is it too early to celebrate for investors?

There were apprehensions in the month of April and the early part of May that despite the Covid cases in India, our equity markets were not reacting negatively enough. However, this behaviour of the market needed to be seen in the context of 2 factors: unlike in the first wave, we presently have vaccines to reduce the impact. Further, though the Nifty 50 fell only marginally in May, our equity market underperformed global markets which touched new highs in April. In recent weeks, since we are thankfully seeing a gradual decline in Covid infections nationwide, the markets have now touched a new high. 

Investors are looking beyond the present and possibly the next quarter, towards FY23. The directional intent provided in the Budget this year has also provided a conducive environment for longer-term growth beyond FY23 as well. Interest rates continue to remain low, and equities continue to present a relatively more attractive investment option for long term investors.

Commodities have been up and running. We saw steel stocks skyrocket, then sugar stocks, what do you expect ahead for commodities?

Over the past several months, we have seen prices of base metals rising partly due to positive newsflow and largely due to the announcements of global stimulus. But since the extent of the rise in prices has been excessive, we are seeing measures from the Chinese Government to cool off these prices. However, prices are nevertheless much higher than the mean, and a higher demand coupled with some constraints in production from the carbon emission reduction perspective could lead to sustenance of prices at the present reasonably high levels (though further increases may be limited).

There is a possibility of a cyclical strength extending from here, however, investors need to be careful while playing a theme such as commodities, particularly after an excessive rally. For agri-commodities, since the monsoon forecast for this year is normal, and given the high level of reservoirs, we could see higher acreages reining in agri-commodity inflation domestically.  CY21 remains normal, and a high ground-water level due to successive good monsoons, are factors bode well for acreages.

What do you make of the earnings of India Inc in the January-march quarter? Will Q1 numbers be severely hit by lockdowns?

On an overall basis, a majority of companies have delivered earnings better than expected in the Jan-Mar quarter, though the number of such companies may be slightly lower than the number witnessed in the earlier two quarters.  We saw better-than-expected results in metals and cement, and mixed results in financials and industrials. The results from the auto sector indicated pressure on EBITDA margins due to the rising input costs, and a cautious commentary in the near-term due to the closure of dealerships. 

In terms of near-term outlook, the localized lockdowns across states will impact the Q1FY22 outlook. How the base will be low due to the corresponding weak quarter of FY21. Therefore, while the numbers could look disappointing as compared to expectations, the year-on-year figures may by themselves not appear poor.

What are the major themes that you are looking to play in the coming quarters?

We were overweight on the pharma and agro chem sectors, and this has played out well in recent months. We continue to have a large weight in the pharma sector though we could see some consolidation after the large recent up-move. Our largest holding is in the financial sector, which, we expect, will do well in the latter part of this year. We could also see some themes in the auto sector doing well in coming quarters as the focus shifts back on personal mobility after the end of the lockdown. A combination of cement, industrials and metals, too, is a positioning from the perspective of domestic housing/infra and global trends, which could play out.

Apart from Covid-19 what risk do you see ahead for domestic markets? 

A lesser pent-up consumer demand (compared to last year), inability of corporates to fully pass on input costs, FII outflows and fears of a sovereign rating downgrade could be some risks that one would need to be cognizant of. At the same time, we need to also consider that a strong global growth, buoyant liquidity, corporate learnings from the first wave, and the scheduled ramp-up in vaccine production are factors that are presenting a positive outlook in Fy22, and the corporate earnings growth over Fy20-23 continues to be a likely CAGR of above 20%.

We are witnessing downgrades in GDP growth estimates by leading economists, from the 11-12% range to the 9-10% range, for Fy22. There are apprehensions about the possibility of a lesser pent-up demand compared to a similar situation in the previous year, due to a greater severity (and suddenness!) of the infection in the second wave, as well as due to a concentration of the infections in more affluent households and a wider spread in rural areas, relative to the first wave. Therefore the impact on income and health could lead to a higher level of risk-aversion, and a slower revival in consumer demand. 

(The stock recommendations in this story are by the respective research analysts and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Capital markets investments are subject to rules and regulations. Please consult your investment advisor before investing.)

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